ALSOBY
DonTapscott
ParadigmShift:TheNewPromiseofInformationTechnology(1993)
Coauthor,ArtCastonTheDigitalEconomy:PromiseandPerilintheAgeof
NetworkedIntelligence(1995)GrowingUpDigital:TheRiseoftheNet
Generation(1997)
WhoKnows:SafeguardingYourPrivacyinaNetworkedWorld(1997)
Coauthor,AnnCavoukianDigitalCapital:HarnessingthePowerofBusiness
Webs(2000)
Coauthors,DavidTicollandAlexLowyTheNakedCorporation:HowtheAge
ofTransparencyWillRevolutionizeBusiness(2003)
Coauthor,DavidTicollWikinomics:HowMassCollaborationChanges
Everything(2006)
Coauthor,AnthonyD.WilliamsGrownUpDigital:HowtheNetGenerationIs
ChangingtheWorld(2008)Macrowikinomics:NewSolutionsforaConnected
Planet(2010)
Coauthor,AnthonyD.Williams
AnimprintofPenguinRandomHouseLLC
375HudsonStreet
NewYork,NewYork10014
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creativity,encouragesdiversevoices,promotesfreespeech,andcreatesavibrantculture.Thankyou
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ISBN:9781101980132
InternationaleditionISBN:9780399564062
ISBN:9781101980156(ebook)Whiletheauthorhasmadeeveryefforttoprovideaccurate
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afterpublication.Further,thepublisherdoesnothaveanycontroloveranddoesnotassumeany
responsibilityforauthororthird-partyWebsitesortheircontent.
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ToAnaLopesandAmyWelsmanforenablingthisbook,andfor
understandingthat“it’sallabouttheblockchain.”
“Amasterpiece.Gracefullydissectsthepotentialofblockchaintechnologytotakeontoday’smostpressing
globalchallenges.”
—HernandoDeSoto,EconomistandPresident,InstituteforLibertyandDemocracy,Peru
“TheblockchainistotrustastheInternetistoinformation.LiketheoriginalInternet,blockchainhas
potentialtotransformeverything.Readthisbookandyouwillunderstand.”
—JoichiIto,Director,MITMediaLab
“Inthisextraordinaryjourneytothefrontiersoffinance,theTapscottsshednewlightontheblockchain
phenomenonandmakeacompellingcaseforwhyweallneedtobetterunderstanditspowerandpotential.”
—DaveMcKay,PresidentandCEO,RoyalBankofCanada
“Deconstructsthepromiseandperiloftheblockchaininawaythatisatonceaccessibleanderudite.
BlockchainRevolutiongivesreadersaprivilegedsneakpeakatthefuture.”
—AlecRoss,author,TheIndustriesoftheFuture
“Ifevertherewasatopicfordemystification,blockchainisit.Together,theTapscottshaveachievedthis
comprehensivelyandindoingsohavecapturedtheexcitement,thepotential,andtheimportanceofthis
topictoeveryone.”
—BlytheMasters,CEO,DigitalAssetHoldings
“ThisisabookwiththepredictivequalityofOrwell’s1984andthevisionofElonMusk.Readitorbecome
extinct.”
—TimDraper,Founder,DraperAssociates,DFJ,andDraperUniversity
“Blockchainisaradicaltechnologicalwaveand,ashehasdonesooften,Tapscottisoutthere,nowwith
sonAlex,surfingatdawn.It’squitearide.”
—YochaiBenkler,BerkmanProfessorofEntrepreneurialLegalStudies,HarvardLawSchool
“Ifyouworkinbusinessorgovernment,youneedtounderstandtheblockchainrevolution.Noonehas
writtenamorethoroughlyresearchedorengagingbookonthistopicthanTapscottandTapscott.”
—ErikBrynjolfsson,ProfessoratMIT;coauthorofTheSecondMachineAge
“Anindispensableandup-to-the-minuteaccountofhowthetechnologyunderlyingbitcoincould—and
should—unleashthetruepotentialofadigitaleconomyfordistributedprosperity.”
—DouglasRushkoff,authorofPresentShockandThrowingRocksattheGoogleBus
“Technologicalchangethatusedtodevelopoveragenerationnowhitsusinarelativeblinkoftheeye,and
noonetellsthisstorybetterthantheTapscotts.”
—EricSpiegel,PresidentandCEO,SiemensUSA
“FewleaderspushustolookaroundcornersthewayDonTapscottdoes.WithBlockchainRevolutionhe
andhissonAlexteachus,challengeus,andshowusanentirelynewwaytothinkaboutthefuture.”
—BillMcDermott,CEO,SAPSE
BlockchainRevolutionisabrilliantmixofhistory,technology,andsociologythatcoversallaspectsofthe
blockchainprotocol—aninventionthatintimemayproveasmomentousastheinventionofprinting.”
—JamesRickards,authorofCurrencyWarsandTheDeathofMoney
BlockchainRevolutionservesasanatlastotheworldofdigitalmoney,masterfullyexplainingthecurrent
landscapewhilesimultaneouslyilluminatingapathforwardtowardamoreequitable,efficient,and
connectedglobalfinancialsystem.”
—JimBreyer,CEO,BreyerCapital
BlockchainRevolutionistheindispensableanddefinitiveguidetothisworld-changingtechnology.”
—JerryBrito,ExecutiveDirector,CoinCenter
“Incredible.Reallyincredible.TheTapscotts’examinationoftheblockchainasamodelforinclusioninan
increasinglycentralizedworldisbothnuancedandextraordinary.”
—SteveLuczo,ChairmanandCEO,SeagateTechnology
“Makesapowerfulcaseforblockchain’sabilitytoincreasetransparencybutalsoensureprivacy.Inthe
authors’words,‘TheInternetofThingsneedsaLedgerofThings.’”
—ChandraChandrasekaran,CEOandManagingDirector,TataConsultancyServices
“Theepicenteroftrustisabouttodiffuse!Thedefinitivenarrativeontherevolutionarypossibilitiesofa
decentralizedtrustsystem.”
—FrankD’Souza,CEO,Cognizant
“Identifiesaprofoundnewtechnologymovementandconnectsittothedeepestofhumanneeds:trust.
Thoroughlyresearchedandprovocativelywritten.Everyseriousbusinesspersonandpolicymakerneedsto
readBlockchainRevolution.”
—BrianFetherstonhaugh,ChairmanandCEO,OgilvyOneWorldwide
BlockchainRevolutionsetsthetableforawaveoftechnologicaladvancementthatisonlyjustbeginning.”
—FrankBrown,ManagingDirectorandChiefOperatingOffice,GeneralAtlantic
“Amustread.You’llgainadeepunderstandingofwhytheblockchainisquicklybecomingoneofthemost
importantemergingtechnologiessincetheInternet.”
—BrianForde,DirectorofDigitalCurrencyInitiative,MITMediaLab
“Blockchaintechnologyhasthepotentialtorevolutionizeindustry,finance,andgovernment—amustread
foranyoneinterestedinthefutureofmoneyandhumanity.”
—PerianneBoring,FounderandPresident,ChamberofDigitalCommerce
“Whengenerationaltechnologychangestheworldinwhichwelive,wearetrulyfortunatetohave
cartographerslikeDonTapscott,andnowhissonAlex,toexplainwherewe’regoing.”
—RayLane,ManagingPartner,GreatPointVentures;PartnerEmeritus,KleinerPerkins
“DonandAlexhavewrittenthedefinitiveguidebookforthosetryingtonavigatethisnewandpromising
frontier.”
—BenjaminLawsky,FormerSuperintendentofFinancialServices,StateofNewYork;CEOof
TheLawskyGroup
BlockchainRevolutionisanilluminating,criticallyimportantmanifestoforthenextdigitalage.”
—DanPontefract,authorofThePurposeEffect;ChiefEnvisioner,TELUS
“Themostwell-researched,thorough,andinsightfulbookonthemostexcitingnewtechnologysincethe
Internet.Aworkofexceptionalclarityandastonishinglybroadanddeepinsight.”
—AndreasAntonopoulos,authorofMasteringBitcoin
BlockchainRevolutionbeautifullycapturesandilluminatesthebravenewworldofdecentralized,trustless
money.”
—TylerWinklevoss,Cofounder,GeminiandWinklevossCapital
“Afascinating—andreassuring—insightintoatechnologywiththepowertoremaketheglobaleconomy.
Whataprize.Whatabook!”
—PaulPolman,CEO,Unilever
CONTENTS
AlsobyDonTapscott
TitlePage
Copyright
Dedication
PraiseforDonTapscottandAlexTapscott
Acknowledgments
PARTI:SayYouWantaRevolution
CHAPTER1:TheTrustProtocol
InSearchoftheTrustProtocol
HowThisWorldwideLedgerWorks
ARationalExuberancefortheBlockchain
AchievingTrustintheDigitalAge
ReturnoftheInternet
YourPersonalAvatarandtheBlackBoxofIdentity
APlanforProsperity
PromiseandPeriloftheNewPlatform
CHAPTER2:BootstrappingtheFuture:SevenDesignPrinciplesofthe
BlockchainEconomy
TheSevenDesignPrinciples
1.NetworkedIntegrity
2.DistributedPower
3.ValueasIncentive
4.Security
5.Privacy
6.RightsPreserved
7.Inclusion
DesigningtheFuture
PARTII:Transformations
CHAPTER3:ReinventingFinancialServices
ANewLookfortheWorld’sSecond-OldestProfession
TheGoldenEight:HowtheFinancialServicesSectorWillChange
FromStockExchangestoBlockExchanges
Dr.Faust’sBlockchainBargain
TheBankApp:WhoWillWininRetailBanking
GoogleTranslateforBusiness:NewFrameworksforAccountingand
CorporateGovernance
Reputation:YouAreYourCreditScore
TheBlockchainIPO
TheMarketforPredictionMarkets
RoadMapfortheGoldenEight
CHAPTER4:Re-architectingtheFirm:TheCoreandtheEdges
BuildingConsenSys
ChangingtheBoundariesoftheFirm
DeterminingCorporateBoundaries
CHAPTER5:NewBusinessModels:MakingItRainonthe
Blockchain
bAirbnbVersusAirbnb
GlobalComputing:TheRiseofDistributedApplications
TheDAppKings:DistributedBusinessEntities
AutonomousAgents
DistributedAutonomousEnterprises
TheBigSeven:OpenNetworkedEnterpriseBusinessModels
HackingYourFuture:BusinessModelInnovation
CHAPTER6:TheLedgerofThings:AnimatingthePhysicalWorld
PowertothePeople
TheEvolutionofComputing:FromMainframestoSmartPills
TheInternetofThingsNeedsaLedgerofThings
TheTwelveDisruptions:AnimatingThings
TheEconomicPayoff
TheFuture:FromUbertoSUber
HackingYourFutureforaWorldofSmartThings
CHAPTER7:SolvingtheProsperityParadox:EconomicInclusionand
Entrepreneurship
APigIsNotaPiggyBank
TheNewProsperityParadox
RoadMaptoProsperity
Remittances:TheStoryofAnalieDomingo
BlockchainHumanitarianAid
SafeasHouses?TheRoadtoAssetOwnership
ImplementationChallengesandLeadershipOpportunities
CHAPTER8:RebuildingGovernmentandDemocracy
SomethingIsRottenintheState
High-PerformanceGovernmentServicesandOperations
EmpoweringPeopletoServeSelvesandOthers
TheSecondEraofDemocracy
BlockchainVoting
AlternativeModelsofPoliticsandJustice
EngagingCitizenstoSolveBigProblems
WieldingToolsofTwenty-first-CenturyDemocracy
CHAPTER9:FreeingCultureontheBlockchain:MusictoOurEars
FairTradeMusic:FromStreamingMusictoMeteringRights
ArtleryforArtLovers:ConnectingArtistsandPatrons
Privacy,FreeSpeech,andFreePressontheBlockchain
GettingtheWordOut:TheCriticalRoleofEducation
CultureontheBlockchainandYou
PARTIII:PromiseandPeril
CHAPTER10:OvercomingShowstoppers:TenImplementation
Challenges
1.TheTechnologyIsNotReadyforPrimeTime
2.TheEnergyConsumedIsUnsustainable
3.GovernmentsWillStifleorTwistIt
4.PowerfulIncumbentsoftheOldParadigmWillUsurpIt
5.TheIncentivesAreInadequateforDistributedMassCollaboration
6.TheBlockchainIsaJobKiller
7.GoverningtheProtocolsIsLikeHerdingCats
8.DistributedAutonomousAgentsWillFormSkynet
9.BigBrotherIs(Still)WatchingYou
10.CriminalsWillUseIt
ReasonsBlockchainWillFailorImplementationChallenges?
CHAPTER11:LeadershipfortheNextEra
WhoWillLeadaRevolution?
TheBlockchainEcosystem:YouCan’tTellthePlayersWithoutaRoster
ACautionaryTaleofBlockchainRegulation
TheSenatorWhoWouldChangetheWorld
CentralBanksinaDecentralizedEconomy
RegulationVersusGovernance
ANewFrameworkforBlockchainGovernance
ANewAgendafortheNextDigitalAge
TheTrustProtocolandYou
Notes
Index
ACKNOWLEDGMENTS
Thisbookcamefromthemeetingoftwomindsandtwolifetrajectories.Don
hadbeenleadinga$4millionsyndicatedresearchprogramcalledGlobal
SolutionNetworks(GSN)attheRotmanSchoolofManagement,Universityof
Toronto.Theinitiativewasinvestigatingnew,networkedmodelsofglobal
problemsolvingandgovernance.HeresearchedhowtheInternetwasgoverned
byamultistakeholderecosystemandbecameinterestedindigitalcurrenciesand
theirgovernance.Meanwhile,Alexwasanexecutivewiththeinvestmentbank
CanaccordGenuity.Henoticedthegrowingenthusiasmforearly-stagebitcoin
andblockchaincompaniesin2013andbeganleadinghisfirm’seffortsinthe
space.Duringafather-sonskitriptoMont-Tremblantinearly2014,we
brainstormedoverdinneraboutcollaboratingonthistopic,andAlexagreedto
leadaresearchprojectonthegovernanceofdigitalcurrencies,culminatingin
hiswhitepaper,titledABitcoinGovernanceNetwork.Themorewedugintothe
issues,themoreweconcludedthatthiscouldbethenextbigthing.
Meanwhileouragent,WesNeffattheLeighBureau,alongwithDon’s
publisherAdrianZackheimatPortfolio/Penguin(Wikinomics,
Macrowikinomics),wasencouragingDontoformulateanewbookconcept.
WhenAlex’spaperbecamewidelyrecognizedasleadingthinkinginthisarea,
DonapproachedAlextobehiscoauthor.Adrian,tohiscredit,madeusanoffer
wecouldn’trefuseandthebookneverwenttoauction,asisnormallythecase.
Wethenmadewhatinhindsightwasasmartdecision.Weapproachedthe
bestbookeditorweknew,KirstenSandberg,formerlyofHarvardBusiness
SchoolPress,andaskedhertoeditourbookproposal.Shedidaspectacularjob
andourcollaborationwassoeffortlessthatweaskedhertobeafull-time
memberofthebookresearchteam.Kirstenparticipatedwithusinmorethanone
hundredinterviewsandcollaboratedinrealtimeaswetriedtounderstandthe
myriadissuesonthetableanddevelophelpfulformulationstoexplainthis
extraordinarysetofdevelopmentstoanontechnicalaudience.Shehelpedus
bringthestorytolife.Inthatsense,shewasourcoauthorandthisbookwould
nothaveappeared,atleastinitscurrentcomprehensibleform,withouther.For
that,andforallthestimulationandlaughlines,weareverygrateful.
Ourheartfeltthankstothepeoplebelowwhogenerouslysharedtheirtime
andinsightswithusandwithoutwhomthisbookwouldnotbepossible.In
alphabeticalorder:JeremyAllaire,Founder,Chairman,andCEO,CircleMarc
Andreessen,Cofounder,AndreessenHorowitzGavinAndresen,ChiefScientist,
BitcoinFoundationDinoAngaritis,CEO,Smartwallet
AndreasAntonopoulos,Author,MasteringBitcoin
FedericoAst,CrowdJury
SusanAthey,EconomicsofTechnologyProfessor,StanfordGraduateSchoolof
BusinessAdamBack,CofounderandPresident,BlockstreamBillBarhydt,
CEO,Abra
ChristopherBavitz,ManagingDirector,CyberlawClinic,HarvardLawSchool
GeoffBeattie,Chairman,RelayVentures
SteveBeauregard,CEOandFounder,GoCoin
MarianoBelinky,ManagingPartner,SantanderInnoVenturesYochaiBenkler,
BerkmanProfessorofEntrepreneurialStudies,HarvardLawSchoolJake
Benson,CEOandFounder,LibraTax
TimBerners-Lee,Inventor,WorldWideWeb
DougBlack,Senator,CanadianSenate,GovernmentofCanadaPerrianeBoring,
FounderandPresident,ChamberofDigitalCommerceDavidBray,2015
EisenhowerFellowandHarvardVisitingExecutiveinResidenceJerry
Brito,ExecutiveDirector,CoinCenter
PaulBrody,AmericasStrategyLeader,TechnologyGroup,EY(formerlyIoTat
IBM)RichardG.Brown,CTO,R3CEV(formerExecutiveArchitectfor
IndustryInnovationandBusinessDevelopment,IBM)VitalikButerin,
Founder,Ethereum
PatrickByrne,CEO,Overstock
BruceCahan,VisitingScholar,StanfordEngineering;StanfordSustainable
BankingInitiativeJamesCarlyle,ChiefEngineer,MD,R3CEV
NicolasCary,Cofounder,BlockchainLtd.
ToniLaneCasserly,CEO,CoinTelegraph
ChristianCatalini,AssistantProfessor,MITSloanSchoolofManagementAnn
Cavoukian,ExecutiveDirector,PrivacyandBigDataInstitute,Ryerson
UniversityVintCerf,Co-creatoroftheInternetandChiefInternet
Evangelist,GoogleBenChan,SeniorSoftwareEngineer,BitGo
RobinChase,CofounderandFormerCEO,ZipcarFadiChehadi,CEO,ICANN
ConstanceChoi,Principal,SevenAdvisory
JohnH.Clippinger,CEO,ID3,ResearchScientist,MITMediaLabBram
Cohen,Creator,BitTorrent
AmyCortese,Journalist,Founder,Locavest
J-FCourville,ChiefOperatingOfficer,RBCWealthManagementPatrick
Deegan,CTO,PersonalBlackBox
PrimaveraDeFilippi,PermanentResearcher,CNRSandFacultyAssociateatthe
BerkmanCenterforInternetandSocietyatHarvardLawSchoolHernando
deSoto,President,InstituteforLibertyandDemocracyPeronetDespeignes,
SpecialOps,Augur
JacobDienelt,BlockchainArchitectandCFO,itBitandFactomJoelDietz,
SwarmCorp
HelenDisney,(formerly)BitcoinFoundation
AdamDraper,CEOandFounder,BoostVC
TimothyCookDraper,VentureCapitalist;Founder,DraperFisherJurvetson
AndrewDudley,FounderandCEO,EarthObservationJoshuaFairfield,
ProfessorofLaw,WashingtonandLeeUniversityGrantFondo,Partner,
SecuritiesLitigationandWhiteCollarDefenseGroup,PrivacyandData
SecurityPractice,GoodwinProcterLLP
BrianForde,FormerSeniorAdviser,TheWhiteHouse;Director,Digital
Currency,MITMediaLabMikeGault,CEO,Guardtime
GeorgeGilder,FounderandPartner,GilderTechnologyFundGeoffGordon,
CEO,Vogogo
VinayGupta,ReleaseCoordinator,Ethereum
JamesHazard,Founder,CommonAccord
ImogenHeap,Grammy-WinningMusicianandSongwriterMikeHearn,Former
GoogleEngineer,Vinumeris/LighthouseAustinHill,CofounderandChief
Instigator,BlockstreamToomasHendrikIlves,PresidentofEstonia
JoichiIto,Director,MITMediaLab
EricJennings,CofounderandCEO,Filament
IzabellaKaminska,FinancialReporter,FinancialTimes
PaulKemp-Robertson,CofounderandEditorialDirector,Contagious
CommunicationsAndrewKeys,ConsensusSystems
JoyceKim,ExecutiveDirector,StellarDevelopmentFoundationPeterKirby,
CEOandCofounder,Factom
JoeyKrug,CoreDeveloper,Augur
HalukKulin,CEO,PersonalBlackBox
ChrisLarsen,CEO,RippleLabs
BenjaminLawsky,FormerSuperintendentofFinancialServicesfortheStateof
NewYork;CEO,TheLawskyGroupCharlieLee,Creator,CTO;Former
EngineeringManager,LitecoinMatthewLeibowitz,Partner,PlazaVentures
VinnyLingham,CEO,Gyft
JuanLlanos,EVPofStrategicPartnershipsandChiefTransparencyOfficer,
Bitreserve.orgJosephLubin,CEO,ConsensusSystems
AdamLudwin,Founder,Chain.com
ChristianLundkvist,Balanc3
DavidMcKay,PresidentandChiefExecutiveOfficer,RBC
JannaMcManus,GlobalPRDirector,BitFury
MickeyMcManus,MayaInstitute
JesseMcWaters,FinancialInnovationSpecialist,WorldEconomicForumBlythe
Masters,CEO,DigitalAssetHoldings
AlistairMitchell,ManagingPartner,GenerationVenturesCarlosMoreira,
Founder,Chairman,andCEO,WISeKeyTomMornini,Founderand
CustomerAdvocate,SubledgerEthanNadelmann,ExecutiveDirector,Drug
PolicyAllianceAdamNanjee,HeadofFintechCluster,MaRS
DanielNeis,CEOandCofounder,KOINA
KellyOlson,NewBusinessInitiative,Intel
SteveOmohundro,President,Self-AwareSystemsJimOrlando,Managing
Director,OMERSVenturesLawrenceOrsini,CofounderandPrincipal,LO3
EnergyPaulPacifico,CEO,FeaturedArtistsCoalitionJosePagliery,Staff
Reporter,CNNMoney
StephenPair,CofounderandCEO,BitPayInc.
VikramPandit,FormerCEO,Citigroup;CoinbaseInvestor,PortlandSquare
CapitalJackPeterson,CoreDeveloper,Augur
EricPiscini,Principal,Banking/Technology,DeloitteConsultingKausik
Rajgopal,SiliconValleyOfficeLeader,McKinseyandCompanySuresh
Ramamurthi,ChairmanandCTO,CBWBankSunnyRay,CEO,
Unocoin.com
CaterinaRindi,CommunityManager,SwarmCorpEduardoRoblesElvira,
CTO,AgoraVoting
KeonneRodriguez,ProductLead,BlockchainLtd.
MatthewRoszak,FounderandCEO,TallyCapitalColinRule,Chairmanand
CEO,Modria.com
MarcoSantori,Counsel,PillsburyWinthropShawPittmanLLP
FrankSchuil,CEO,Safello
BarrySilbert,FounderandCEO,DigitalCurrencyGroupThomasSpaas,
Director,BelgiumBitcoinAssociationBalajiSrinivasan,CEO,21;Partner,
AndreessenHorowitzLynnSt.Amour,FormerPresident,TheInternet
SocietyBrettStapper,FounderandCEO,FalconGlobalCapitalLLC
ElizabethStark,VisitingFellow,YaleLawSchoolJuttaSteiner,
Ethereum/Provenance
MelanieSwan,Founder,InstituteforBlockchainStudiesNickSzabo,GWU
Law
AshleyTaylor,ConensysSystems
SimonTaylor,VPEntrepreneurialPartnerships,BarclaysDavidThomson,
Founder,Artlery
MichelleTinsley,Director,MobilityandPaymentSecurity,IntelPeterTodd,
ChiefNaysayer,CoinKite
JasonTyra,CoinDesk
ValeryVavilov,CEO,BitFury
AnnLouiseVehovec,SeniorVicePresident,StrategicProjects,RBCFinancial
GroupRogerVer,“TheBitcoinJesus,”MemorydealersKK
AkseliVirtanen,HedgeFundManager,RobinHoodAssetManagementErik
Voorhees,CEOandFounder,ShapeShift
JoeWeinberg,CofounderandCEO,Paycase
DerekWhite,ChiefDesignandDigitalOfficer,BarclaysBankTedWhitehead,
SeniorManagingDirector,ManulifeAssetManagementZookoWilcox-
O’Hearn,CEO,LeastAuthorityEnterprisesCarolynWilkins,SeniorDeputy
Governor,BankofCanadaRobertWilkins,CEO,myVBO
CameronWinklevoss,Founder,WinklevossCapitalTylerWinklevoss,Founder,
WinklevossCapitalPindarWong,InternetPioneer,ChairmanofVeriFi
GabrielWoo,VicePresidentofInnovation,RBCFinancialGroupGavin
Wood,CTO,EthereumFoundation
AaronWright,Professor,CardozoLawSchool,YeshivaUniversityJonathan
Zittrain,HarvardLawSchool
Alsospecialthankstoafewpeoplewhoreallyrolleduptheirsleevestohelp.
AnthonyWilliamsandJoanBighamoftheGSNprojectworkedcloselywith
Alexontheoriginaldigitalcurrenciesgovernancepaper.FormerCisco
executiveJoanMcCalladiddeepresearchforthechaptersontheInternetof
ThingsandalsoGovernmentandDemocracy.Wereceivedalotoffamilial
support.ITexecutiveBobTapscottspentmanydaysdownloadingandgetting
underthehoodoftheentirebitcoinblockchaintogiveusfirsthandinsightson
someofthetechnicalissues.TechnologyentrepreneurBillTapscottcameup
withtherevolutionaryideaofablockchain-basedpersonalcarboncredittrading
system,andtechnologyexecutiveNikiTapscottandherhusband,financial
analystJamesLeo,havebeengreatsoundingboardsthroughout.Katherine
MacLellanoftheTapscottGroup(convenientlyalawyer)tackledsomeofthe
tougherissuesaroundsmartcontractsaswellasmanagingtheinterviewprocess.
PhilCourneyeurwasonthelookoutdailyforjuicymaterial,andDavidTicoll
providedhelpfulinsightsaboutthestateofthedigitalagesofar.WesNeffand
BillLeighoftheLeighBureauhelpeduscraftthebookconcept(howmany
booksisthis,guys?).Asalways(nowmorethantwentyyears),JodyStevens
flawlesslymanagedtheadministrationfortheentireprojectincludingdatabases,
finances,anddocumentmanagement,aswellastheproofreadingandproduction
process—afull-timejob,inadditiontoherotherfull-timejobsattheTapscott
Group.
SpecialthankstoDinoMarkAngaritis,theCEOofblockchaincompany
Smartwallet;JosephLubin,CEOoftheEthereumdevelopmentstudio
ConsensusSystems;andCarlosMoreiraoffast-growingsecuritycompany
WISeKey—whoeachspentconsiderabletimewithusbrainstormingideas.They
areeachbrilliantandsokindtohelpusout.Nowwegettoenjoywitnessingthe
successofeachoftheirbusinessesinthisspace.Alsobigthankstothegreat
teamatPenguinRandomHouseledbyoureditorJesseMaeshiroandoverseen
byAdrianZackheim.
Mostimportant,we’dliketogiveourheartfeltthankstoourwives,Ana
Lopes(Don)andAmyWelsman(Alex),whomorethantoleratedourobsession
withcrackingthisbignutoverthebetterpartofayear.Wearebothvery
fortunatetohavesuchwonderfullifepartners.
Writingthisbookhasbeenajoyousexperienceforbothofusandit’sfairto
saythatwelovedeveryminuteofit.Assomeonefamousoncesaid,“Iftwo
peopleagreeoneverything,oneofthemisunnecessary.”Wechallengedeach
otherdailytotestourbeliefsandassumptions,andthisbookislivingproofof
thathealthyandvigorouscollaboration.Mindyou,collaboratingdoesseem
effortlesswhenyousharesomuchDNAandhaveasharedthirty-yearhistoryof
exploringtheworldtogether.Wedohopeyoufindtheproductofthis
collaborationimportantandhelpful.
DonTapscottandAlexTapscott,January2016
PARTI
SAYYOUWANTAREVOLUTION
I
CHAPTER1
THETRUSTPROTOCOL
tappearsthatonceagain,thetechnologicalgeniehasbeenunleashedfromits
bottle.Summonedbyanunknownpersonorpersonswithunclearmotives,at
anuncertaintimeinhistory,thegenieisnowatourserviceforanotherkickat
thecan—totransformtheeconomicpowergridandtheoldorderofhuman
affairsforthebetter.Ifwewillit.
Letusexplain.
ThefirstfourdecadesoftheInternetbroughtuse-mail,theWorldWide
Web,dot-coms,socialmedia,themobileWeb,bigdata,cloudcomputing,and
theearlydaysoftheInternetofThings.Ithasbeengreatforreducingthecosts
ofsearching,collaborating,andexchanginginformation.Ithasloweredthe
barrierstoentryfornewmediaandentertainment,newformsofretailingand
organizingwork,andunprecedenteddigitalventures.Throughsensor
technology,ithasinfusedintelligenceintoourwallets,ourclothing,our
automobiles,ourbuildings,ourcities,andevenourbiology.Itissaturatingour
environmentsocompletelythatsoonwewillnolonger“logon”butrathergo
aboutourbusinessandourlivesimmersedinpervasivetechnology.
Overall,theInternethasenabledmanypositivechanges—forthosewith
accesstoit—butithasseriouslimitationsforbusinessandeconomicactivity.
TheNewYorkercouldrerunPeterSteiners1993cartoonofonedogtalkingto
anotherwithoutrevision:“OntheInternet,nobodyknowsyou’readog.”Online,
westillcan’treliablyestablishoneanothersidentitiesortrustoneanotherto
transactandexchangemoneywithoutvalidationfromathirdpartylikeabankor
agovernment.Thesesameintermediariescollectourdataandinvadeourprivacy
forcommercialgainandnationalsecurity.EvenwiththeInternet,theircost
structureexcludessome2.5billionpeoplefromtheglobalfinancialsystem.
Despitethepromiseofapeer-to-peerempoweredworld,theeconomicand
politicalbenefitshaveproventobeasymmetrical—withpowerandprosperity
channeledtothosewhoalreadyhaveit,evenifthey’renolongerearningit.
Moneyismakingmoremoneythanmanypeopledo.
Technologydoesn’tcreateprosperityanymorethanitdestroysprivacy.
However,inthisdigitalage,technologyisattheheartofjustabouteverything—
goodandbad.Itenableshumanstovalueandtoviolateoneanothersrightsin
profoundnewways.Theexplosioninonlinecommunicationandcommerceis
creatingmoreopportunitiesforcybercrime.Moore’slawoftheannualdoubling
ofprocessingpowerdoublesthepoweroffraudstersandthieves—“Moore’s
Outlaws”
1
—nottomentionspammers,identitythieves,phishers,spies,zombie
farmers,hackers,cyberbullies,anddatanappers—criminalswhounleash
ransomwaretoholddatahostage—thelistgoeson.
INSEARCHOFTHETRUSTPROTOCOL
Asearlyas1981,inventorswereattemptingtosolvetheInternet’sproblemsof
privacy,security,andinclusionwithcryptography.Nomatterhowthey
reengineeredtheprocess,therewerealwaysleaksbecausethirdpartieswere
involved.PayingwithcreditcardsovertheInternetwasinsecurebecauseusers
hadtodivulgetoomuchpersonaldata,andthetransactionfeesweretoohighfor
smallpayments.
In1993,abrilliantmathematiciannamedDavidChaumcameupwith
eCash,adigitalpaymentsystemthatwas“atechnicallyperfectproductwhich
madeitpossibletosafelyandanonymouslypayovertheInternet....Itwas
perfectlysuitedtosendingelectronicpennies,nickels,anddimesoverthe
Internet.”
2
ItwassoperfectthatMicrosoftandotherswereinterestedin
includingeCashasafeatureintheirsoftware.
3
Thetroublewas,onlineshoppers
didn’tcareaboutprivacyandsecurityonlinethen.Chaum’sDutchcompany
DigiCashwentbankruptin1998.
Aroundthattime,oneofChaum’sassociates,NickSzabo,wroteashort
paperentitled“TheGodProtocol,”atwistonNobellaureateLeonLederman’s
phrase“theGodparticle,”referringtotheimportanceoftheHiggsbosonto
modernphysics.Inhispaper,Szabomusedaboutthecreationofabe-allend-all
technologyprotocol,onethatdesignatedGodthetrustedthirdpartyinthe
middleofalltransactions:“AllthepartieswouldsendtheirinputstoGod.God
wouldreliablydeterminetheresultsandreturntheoutputs.Godbeingthe
ultimateinconfessionaldiscretion,nopartywouldlearnanythingmoreabout
theotherparties’inputsthantheycouldlearnfromtheirowninputsandthe
output.”
4
Hispointwaspowerful:DoingbusinessontheInternetrequiresaleap
offaith.Becausetheinfrastructurelacksthemuch-neededsecurity,weoften
havelittlechoicebuttotreatthemiddlemenasiftheyweredeities.
Adecadelaterin2008,theglobalfinancialindustrycrashed.Perhaps
propitiously,apseudonymouspersonorpersonsnamedSatoshiNakamoto
outlinedanewprotocolforapeer-to-peerelectroniccashsystemusinga
cryptocurrencycalledbitcoin.Cryptocurrencies(digitalcurrencies)aredifferent
fromtraditionalfiatcurrenciesbecausetheyarenotcreatedorcontrolledby
countries.Thisprotocolestablishedasetofrules—intheformofdistributed
computations—thatensuredtheintegrityofthedataexchangedamongthese
billionsofdeviceswithoutgoingthroughatrustedthirdparty.Thisseemingly
subtleactsetoffasparkthathasexcited,terrified,orotherwisecapturedthe
imaginationofthecomputingworldandhasspreadlikewildfiretobusinesses,
governments,privacyadvocates,socialdevelopmentactivists,mediatheorists,
andjournalists,tonameafew,everywhere.
“They’relike,‘Ohmygod,thisisit.Thisisthebigbreakthrough.Thisisthe
thingwe’vebeenwaitingfor,’”saidMarcAndreessen,thecocreatorofthefirst
commercialWebbrowser,Netscape,andabiginvestorintechnologyventures.
“‘Hesolvedalltheproblems.WhoeverheisshouldgettheNobelPrize—he’sa
genius.’Thisisthething!ThisisthedistributedtrustnetworkthattheInternet
alwaysneededandneverhad.”
5
Todaythoughtfulpeopleeverywherearetryingtounderstandthe
implicationsofaprotocolthatenablesmeremortalstomanufacturetrustthrough
clevercode.Thishasneverhappenedbefore—trustedtransactionsdirectly
betweentwoormoreparties,authenticatedbymasscollaborationandpowered
bycollectiveself-interests,ratherthanbylargecorporationsmotivatedbyprofit.
ItmaynotbetheAlmighty,butatrustworthyglobalplatformforour
transactionsissomethingverybig.We’recallingittheTrustProtocol.
Thisprotocolisthefoundationofagrowingnumberofglobaldistributed
ledgerscalledblockchains—ofwhichthebitcoinblockchainisthelargest.While
thetechnologyiscomplicatedandthewordblockchainisn’texactlysonorous,
themainideaissimple.Blockchainsenableustosendmoneydirectlyandsafely
frommetoyou,withoutgoingthroughabank,acreditcardcompany,orPayPal.
RatherthantheInternetofInformation,it’stheInternetofValueorof
Money.It’salsoaplatformforeveryonetoknowwhatistrue—atleastwith
regardtostructuredrecordedinformation.Atitsmostbasic,itisanopensource
code:anyonecandownloaditforfree,runit,anduseittodevelopnewtoolsfor
managingtransactionsonline.Assuch,itholdsthepotentialforunleashing
countlessnewapplicationsandasyetunrealizedcapabilitiesthathavethe
potentialtotransformmanythings.
HOWTHISWORLDWIDELEDGERWORKS
Bigbanksandsomegovernmentsareimplementingblockchainsasdistributed
ledgerstorevolutionizethewayinformationisstoredandtransactionsoccur.
Theirgoalsarelaudable—speed,lowercost,security,fewererrors,andthe
eliminationofcentralpointsofattackandfailure.Thesemodelsdon’t
necessarilyinvolveacryptocurrencyforpayments.
However,themostimportantandfar-reachingblockchainsarebasedon
Satoshi’sbitcoinmodel.Here’showtheywork.
Bitcoinorotherdigitalcurrencyisn’tsavedinafilesomewhere;it’s
representedbytransactionsrecordedinablockchain—kindoflikeaglobal
spreadsheetorledger,whichleveragestheresourcesofalargepeer-to-peer
bitcoinnetworktoverifyandapproveeachbitcointransaction.Eachblockchain,
liketheonethatusesbitcoin,isdistributed:itrunsoncomputersprovidedby
volunteersaroundtheworld;thereisnocentraldatabasetohack.Theblockchain
ispublic:anyonecanviewitatanytimebecauseitresidesonthenetwork,not
withinasingleinstitutionchargedwithauditingtransactionsandkeeping
records.Andtheblockchainisencrypted:itusesheavy-dutyencryption
involvingpublicandprivatekeys(ratherlikethetwo-keysystemtoaccessa
safetydepositbox)tomaintainvirtualsecurity.Youneedn’tworryaboutthe
weakfirewallsofTargetorHomeDepotorathievingstafferofMorganStanley
ortheU.S.federalgovernment.
Everytenminutes,liketheheartbeatofthebitcoinnetwork,allthe
transactionsconductedareverified,cleared,andstoredinablockwhichis
linkedtotheprecedingblock,therebycreatingachain.Eachblockmustreferto
theprecedingblocktobevalid.Thisstructurepermanentlytime-stampsand
storesexchangesofvalue,preventinganyonefromalteringtheledger.Ifyou
wantedtostealabitcoin,you’dhavetorewritethecoin’sentirehistoryonthe
blockchaininbroaddaylight.That’spracticallyimpossible.Sotheblockchainis
adistributedledgerrepresentinganetworkconsensusofeverytransactionthat
haseveroccurred.LiketheWorldWideWebofinformation,it’stheWorldWide
Ledgerofvalue—adistributedledgerthateveryonecandownloadandrunon
theirpersonalcomputer.
Somescholarshavearguedthattheinventionofdouble-entrybookkeeping
enabledtheriseofcapitalismandthenation-state.Thisnewdigitalledgerof
economictransactionscanbeprogrammedtorecordvirtuallyeverythingof
valueandimportancetohumankind:birthanddeathcertificates,marriage
licenses,deedsandtitlesofownership,educationaldegrees,financialaccounts,
medicalprocedures,insuranceclaims,votes,provenanceoffood,andanything
elsethatcanbeexpressedincode.
Thenewplatformenablesareconciliationofdigitalrecordsregardingjust
abouteverythinginrealtime.Infact,soonbillionsofsmartthingsinthe
physicalworldwillbesensing,responding,communicating,buyingtheirown
electricityandsharingimportantdata,doingeverythingfromprotectingour
environmenttomanagingourhealth.ThisInternetofEverythingneedsaLedger
ofEverything.Business,commerce,andtheeconomyneedaDigitalReckoning.
Sowhyshouldyoucare?Webelievethetruthcansetusfreeanddistributed
trustwillprofoundlyaffectpeopleinallwalksoflife.Maybeyou’reamusic
loverwhowantsartiststomakealivingofftheirart.Oraconsumerwhowants
toknowwherethathamburgermeatreallycamefrom.Perhapsyou’rean
immigrantwho’ssickofpayingbigfeestosendmoneyhometolovedonesin
yourancestralland.OraSaudiwomanwhowantstopublishherownfashion
magazine.Maybeyou’reanaidworkerwhoneedstoidentifylandtitlesof
landownerssoyoucanrebuildtheirhomesafteranearthquake.Oracitizenfed
upwiththelackoftransparencyandaccountabilityofpoliticalleaders.Orauser
ofsocialmediawhovaluesyourprivacyandthinksallthedatayougenerate
mightbeworthsomething—toyou.Evenaswewrite,innovatorsarebuilding
blockchain-basedapplicationsthatservetheseends.Andtheyarejustthe
beginning.
ARATIONALEXUBERANCEFORTHEBLOCKCHAIN
Forsure,blockchaintechnologyhasprofoundimplicationsformanyinstitutions.
Whichhelpsexplainalltheexcitementfrommanysmartandinfluentialpeople.
BenLawskyquithisjobasthesuperintendentoffinancialservicesforNew
YorkStatetobuildanadvisorycompanyinthisspace.Hetoldus,“Infivetoten
years,thefinancialsystemmaybeunrecognizable...andIwanttobepartof
thechange.”
6
BlytheMasters,formerlychieffinancialofficerandheadofGlobal
CommoditiesatJPMorgan’sinvestmentbank,launchedablockchain-focused
technologystart-uptotransformtheindustry.ThecoveroftheOctober2015
BloombergMarketsfeaturedMasterswiththeheadline“It’sAllAboutthe
Blockchain.”Likewise,TheEconomistrananOctober2015coverstory,“The
TrustMachine,”whicharguedthat“thetechnologybehindbitcoincouldchange
howtheeconomyworks.”
7
ToTheEconomist,blockchaintechnologyis“the
greatchainofbeingsureaboutthings.”Bankseverywherearescramblingtop-
levelteamstoinvestigateopportunities,someofthesewithdozensof
crackerjacktechnologists.Bankerslovetheideaofsecure,frictionless,and
instanttransactions,butsomeflinchattheideaofopenness,decentralization,
andnewformsofcurrency.Thefinancialservicesindustryhasalready
rebrandedandprivatizedblockchaintechnology,referringtoitasdistributed
ledgertechnology,inanattempttoreconcilethebestofbitcoin—security,speed,
andcost—withanentirelyclosedsystemthatrequiresabankorfinancial
institution’spermissiontouse.Tothem,blockchainsaremorereliabledatabases
thanwhattheyalreadyhave,databasesthatenablekeystakeholders—buyers,
sellers,custodians,andregulators—tokeepshared,indeliblerecords,thereby
reducingcost,mitigatingsettlementrisk,andeliminatingcentralpointsof
failure.
Investinginblockchainstart-upsistakingoff,asdidinvestingindot-coms
inthe1990s.Venturecapitalistsareshowingenthusiasmatalevelthatwould
makea1990sdot-cominvestorblush.In2014and2015alone,morethan$1
billionofventurecapitalfloodedintotheemergingblockchainecosystem,and
therateofinvestmentisalmostdoublingannually.
8
“We’requiteconfident,”
saidMarcAndreesseninaninterviewwithTheWashingtonPost,“thatwhen
we’resittingherein20years,we’llbetalkingabout[blockchaintechnology]the
waywetalkabouttheInternettoday.”
9
Regulatorshavealsosnappedtoattention,establishingtaskforcestoexplore
whatkindoflegislation,ifany,makessense.Authoritariangovernmentslike
Russia’shavebannedorseverelylimitedtheuseofbitcoin,ashavedemocratic
statesthatshouldknowbetter,likeArgentina,givenitshistoryofcurrency
crises.MorethoughtfulgovernmentsintheWestareinvestingconsiderablyin
understandinghowthenewtechnologycouldtransformnotonlycentralbanking
andthenatureofmoney,butalsogovernmentoperationsandthenatureof
democracy.CarolynWilkins,theseniordeputygovernoroftheBankofCanada,
believesit’stimeforcentralbankseverywheretoseriouslystudythe
implicationsofmovingentirenationalcurrencysystemstodigitalmoney.The
BankofEngland’stopeconomist,AndrewHaldane,hasproposedanational
digitalcurrencyfortheUnitedKingdom.
10
Theseareheadytimes.Tobesure,thegrowingthrongofenthusiastshasits
shareofopportunists,speculators,andcriminals.Thefirsttalemostpeoplehear
aboutdigitalcurrenciesisthebankruptcyoftheMt.Goxexchangeorthe
convictionofRossWilliamUlbricht,founderoftheSilkRoaddarknetmarket
seizedbytheFederalBureauofInvestigationfortraffickingillegaldrugs,child
pornography,andweaponsusingthebitcoinblockchainasapaymentsystem.
Bitcoin’spricehasfluctuateddrastically,andtheownershipofbitcoinsisstill
concentrated.A2013studyshowedthat937peopleownedhalfofallbitcoin,
althoughthatischangingtoday.
11
HowdowegetfrompornandPonzischemestoprosperity?Tobegin,it’s
notbitcoin,thestillspeculativeasset,thatshouldinterestyou,unlessyou’rea
trader.Thisbookisaboutsomethingbiggerthantheasset.It’saboutthepower
andpotentialoftheunderlyingtechnologicalplatform.
Thisisnottosaythatbitcoinorcryptocurrenciesperseareunimportant,as
somepeoplehavesuggestedastheyscrambletodisassociatetheirprojectsfrom
thescandalousventuresofthepast.Thesecurrenciesarecriticaltothe
blockchainrevolution,whichisfirstandforemostaboutthepeer-to-peer
exchangeofvalue,especiallymoney.
ACHIEVINGTRUSTINTHEDIGITALAGE
Trustinbusinessistheexpectationthattheotherpartywillbehaveaccordingto
thefourprinciplesofintegrity:honesty,consideration,accountability,and
transparency.
12
Honestyisnotjustanethicalissue;ithasbecomeaneconomicone.To
establishtrustingrelationshipswithemployees,partners,customers,
shareholders,andthepublic,organizationsmustbetruthful,accurate,and
completeincommunications.Nolyingthroughomission,noobfuscation
throughcomplexity.
Considerationinbusinessoftenmeansafairexchangeofbenefitsor
detrimentsthatpartieswilloperateingoodfaith.Buttrustrequiresagenuine
respectfortheinterests,desires,orfeelingsofothers,andthatpartiescan
operatewithgoodwilltowardoneanother.
Accountabilitymeansmakingclearcommitmentstostakeholdersand
abidingbythem.Individualsandinstitutionsalikemustdemonstratethatthey
havehonoredtheircommitmentsandownedtheirbrokenpromises,preferably
withtheverificationofthestakeholdersthemselvesorindependentoutside
experts.Nopassingthebuck,noplayingtheblamegame.
Transparencymeansoperatingoutintheopen,inthelightofday.“What
aretheyhiding?”isasignofpoortransparencythatleadstodistrust.Ofcourse,
companieshavelegitimaterightstotradesecretsandotherkindsofproprietary
information.Butwhenitcomestopertinentinformationforcustomers,
shareholders,employees,andotherstakeholders,activeopennessiscentralto
earningtrust.Ratherthandressingforsuccess,corporationscanundressfor
success.
Trustinbusinessandotherinstitutionsismostlyatanall-timelow.The
publicrelationscompanyEdelman’s2015“TrustBarometer”indicatesthattrust
ininstitutions,especiallycorporations,hasfallenbacktolevelsfromthe
dismallylowperiodofthe2008greatrecession.Edelmannotedthateventhe
onceimpregnabletechnologyindustry,stillthemosttrustedbusinesssector,saw
declinesinthemajorityofcountriesforthefirsttime.Globally,CEOsand
governmentofficialscontinuetobetheleastcredibleinformationsources,
laggingfarbehindacademicorindustryexperts.
13
Similarly,Gallupreportedin
its2015surveyofAmericanconfidenceininstitutionsthat“business”ranked
secondlowestamongthefifteeninstitutionsmeasured;fewerthan20percentof
respondentsindicatedtheyhadconsiderableorhighlevelsoftrust.OnlytheU.S.
Congresshadalowerscore.
14
Inthepreblockchainworld,trustintransactionsderivedfromindividuals,
intermediaries,orotherorganizationsactingwithintegrity.Becauseweoften
can’tknowourcounterparties,letalonewhethertheyhaveintegrity,we’vecome
torelyonthirdpartiesnotonlytovouchforstrangers,butalsotomaintain
transactionrecordsandperformthebusinesslogicandtransactionlogicthat
powerscommerceonline.Thesepowerfulintermediaries—banks,governments,
PayPal,Visa,Uber,Apple,Google,andotherdigitalconglomerates—harvest
muchofthevalue.
Intheemergingblockchainworld,trustderivesfromthenetworkandeven
fromobjectsonthenetwork.CarlosMoreiraofthecryptographicsecurity
companyWISeKeysaidthatthenewtechnologieseffectivelydelegatetrust—
eventophysicalthings.“Ifanobject,whetheritbeasensorona
communicationstower,alightbulb,oraheartmonitor,isnottrustedtoperform
wellorpayforservicesitwillberejectedbytheotherobjectsautomatically.”
15
Theledgeritselfisthefoundationoftrust.
16
Tobeclear,“trust”referstobuyingandsellinggoodsandservicesandtothe
integrityandprotectionofinformation,nottrustinallbusinessaffairs.However,
youwillreadthroughoutthisbookhowagloballedgeroftruthfulinformation
canhelpbuildintegrityintoallourinstitutionsandcreateamoresecureand
trustworthyworld.Inourview,companiesthatconductsomeoralloftheir
transactionsontheblockchainwillenjoyatrustbumpinshareprice.
Shareholdersandcitizenswillcometoexpectallpubliclytradedfirmsand
taxpayer-fundedorganizationstoruntheirtreasuries,atminimum,onthe
blockchain.Becauseofincreasedtransparency,investorswillbeabletosee
whetheraCEOreallydeservedthatfatbonus.Smartcontractsenabledby
blockchainswillrequirecounterpartiestoabidebytheircommitmentsandvoters
willbeabletoseewhethertheirrepresentativesarebeinghonestoractingwith
fiscalintegrity.
RETURNOFTHEINTERNET
ThefirsteraoftheInternetstartedwiththeenergyandspiritofayoungLuke
Skywalker—withthebeliefthatanykidfromaharshdesertplanetcouldbring
downanevilempireandstartanewcivilizationbylaunchingadot-com.Naïve
tobesure,butmanypeople,presentcompanyincluded,hopedtheInternet,as
embodiedintheWorldWideWeb,woulddisrupttheindustrialworldwhere
powerwasgrippedbythefewandpowerstructureswerehardtoclimband
hardertotopple.Unliketheoldmediathatwerecentralizedandcontrolledby
powerfulforces,andwheretheuserswereinert,thenewmediaweredistributed
andneutral,andeveryonewasanactiveparticipantratherthanapassive
recipient.Lowcostandmassivepeer-to-peercommunicationontheInternet
wouldhelpunderminetraditionalhierarchiesandhelpwiththeinclusionof
developingworldcitizensintheglobaleconomy.Valueandreputationwould
derivefromqualityofcontribution,notstatus.Ifyouweresmartand
hardworkinginIndia,yourmeritwouldbringyoureputation.Theworldwould
beflatter,moremeritocratic,moreflexible,andmorefluid.Mostimportant,
technologywouldcontributetoprosperityforeveryone,notjustwealthforthe
few.
Someofthishascometopass.Therehavebeenmasscollaborationslike
Wikipedia,Linux,andGalaxyZoo.Outsourcingandnetworkedbusinessmodels
haveenabledpeopleinthedevelopingworldtoparticipateintheglobal
economybetter.Todaytwobillionpeoplecollaborateaspeerssocially.Weall
haveaccesstoinformationinunprecedentedways.
However,theEmpirestruckback.Ithasbecomeclearthatconcentrated
powersinbusinessandgovernmenthavebenttheoriginaldemocratic
architectureoftheInternettotheirwill.
Hugeinstitutionsnowcontrolandownthisnewmeansofproductionand
socialinteraction—itsunderlyinginfrastructure;massiveandgrowingtreasure
trovesofdata;thealgorithmsthatincreasinglygovernbusinessanddailylife;
theworldofapps;andextraordinaryemergingcapabilities,machinelearning,
andautonomousvehicles.FromSiliconValleyandWallStreettoShanghaiand
Seoul,thisnewaristocracyusesitsinsideradvantagetoexploitthemost
extraordinarytechnologyeverdevisedtoempowerpeopleaseconomicactors,to
buildspectacularfortunesandstrengthenitspowerandinfluenceover
economiesandsocieties.
Manyofthedarksideconcernsraisedbyearlydigitalpioneershavepretty
muchmaterialized.
17
Wehavegrowthingrossdomesticproductbutnot
commensuratejobgrowthinmostdevelopedcountries.Wehavegrowingwealth
creationandgrowingsocialinequality.Powerfultechnologycompanieshave
shiftedmuchactivityfromtheopen,distributed,egalitarian,andempowering
Webtoclosedonlinewalledgardensorproprietary,read-onlyapplicationsthat
amongotherthingskilltheconversation.Corporateforceshavecapturedmany
ofthesewonderfulpeer-to-peer,democratic,andopentechnologiesandare
usingthemtoextractaninordinateshareofvalue.
Theupshotisthat,ifanything,economicpowerhasgottenspikier,more
concentrated,andmoreentrenched.Ratherthandatabeingmorewidelyand
democraticallydistributed,itisbeinghoardedandexploitedbyfewerentities
thatoftenuseittocontrolmoreandacquiremorepower.Ifyouaccumulatedata
andthepowerthatcomeswithit,youcanfurtherfortifyyourpositionby
producingproprietaryknowledge.Thisprivilegetrumpsmerit,regardlessofits
origin.
Further,powerful“digitalconglomerates”suchasAmazon,Google,Apple,
andFacebook—allInternetstart-upsatonetime—arecapturingthetreasure
trovesofdatathatcitizensandinstitutionsgenerateofteninprivatedatasilos
ratherthanontheWeb.Whiletheycreategreatvalueforconsumers,oneupshot
isthatdataisbecominganewassetclass—onethatmaytrumppreviousasset
classes.Anotheristheunderminingofourtraditionalconceptsofprivacyand
theautonomyoftheindividual.
GovernmentsofallkindsusetheInternettoimproveoperationsand
services,buttheynowalsodeploytechnologytomonitorandevenmanipulate
citizens.Inmanydemocraticcountries,governmentsuseinformationand
communicationstechnologiestospyoncitizens,changepublicopinion,further
theirparochialinterests,underminerightsandfreedoms,andoveralltostayin
power.RepressivegovernmentslikethoseofChinaandIranenclosetheInternet,
exploitingittocrackdownondissentandmobilizecitizensaroundtheir
objectives.
ThisisnottosaythattheWebisdead,assomehavesuggested.TheWebis
criticaltothefutureofthedigitalworldandallofusshouldsupportefforts
underwaytodefendit,suchasthoseoftheWorldWideWebFoundation,who
arefightingtokeepitopen,neutral,andconstantlyevolving.
Now,withblockchaintechnology,aworldofnewpossibilitieshasopened
uptoreverseallthesetrends.Wenowhaveatruepeer-to-peerplatformthat
enablesthemanyexcitingthingswe’vediscussedinthisbook.Wecaneachown
ouridentitiesandourpersonaldata.Wecandotransactions,creatingand
exchangingvaluewithoutpowerfulintermediariesactingasthearbitersof
moneyandinformation.Billionsofexcludedpeoplecansoonentertheglobal
economy.Wecanprotectourprivacyandmonetizeourowninformation.Wecan
ensurethatcreatorsarecompensatedfortheirintellectualproperty.Ratherthan
tryingtosolvetheproblemofgrowingsocialinequalitythroughthe
redistributionofwealthonly,wecanstarttochangethewaywealthis
distributed—howitiscreatedinthefirstplace,aspeopleeverywherefrom
farmerstomusicianscansharemorefully,apriori,inthewealththeycreate.The
skydoesseemtobethelimit.
It’smoreYodathanGod.Butthisnewprotocol,ifnotdivine,doesenable
trustedcollaborationtooccurinaworldthatneedsit,andthat’salot.Excited,
weare.
YOURPERSONALAVATARANDTHEBLACKBOXOFIDENTITY
Throughouthistory,eachnewformofmediahasenabledmankindtotranscend
time,space,andmortality.That—darewesay—divineabilityinevitablyraises
anewtheexistentialquestionofidentity:Whoarewe?Whatdoesitmeantobe
human?Howdoweconceptualizeourselves?AsMarshallMcLuhanobserved,
themediumbecomesthemessageovertime.Peopleshapeandareshapedby
media.Ourbrainsadapt.Ourinstitutionsadapt.Societyadapts.
“Todayyouneedanorganizationwithendowedrightstoprovideyouwith
anidentity,likeabankcard,afrequentflyercard,oracreditcard,”
18
saidCarlos
MoreiraofWISeKey.Yourparentsgaveyouaname,thestate-licensed
obstetricianormidwifewhodeliveredyoutookyourfootprintandvouchedfor
yourweightandlength,andbothpartiesattestedtothetime,date,andplaceof
yourarrivalbysigningyourbirthcertificate.Nowtheycanrecordthiscertificate
ontheblockchainandlinkbirthannouncementsandacollegefundtoit.Friends
andfamilycancontributebitcointoyourhighereducation.There,yourdataflow
begins.
IntheearlydaysoftheInternet,TomPeterswrote,“Youareyour
projects.”
19
Hemeantthatourcorporateaffiliationsandjobtitlesnolonger
definedus.Whatisequallytruenow:“Youareyourdata.”Troubleis,Moreira
said,“Thatidentityisnowyours,butthedatathatcomesfromitsinteractionin
theworldisownedbysomeoneelse.”
20
That’showmostcorporationsand
institutionsviewyou,byyourdatacontrailacrosstheInternet.Theyaggregate
yourdataintoavirtualrepresentationofyou,andtheyprovidethis“virtualyou”
withextraordinarynewbenefitsbeyondyourparents’happiestdreams.
21
But
conveniencecomeswithaprice:privacy.Thosewhosay“privacyisdead—get
overit”arewrong.
22
Privacyisthefoundationoffreesocieties.
“Peoplehaveaverysimplisticviewofidentity,”
23
saidblockchaintheorist
AndreasAntonopoulos.Weusethewordidentitytodescribetheself,the
projectionofthatselftotheworld,andalltheseattributesthatweassociatewith
thatselforoneofitsprojections.Thesemaycomefromnature,fromthestate,
fromprivateorganizations.Wemayhaveoneormorerolesandaseriesof
metricsattachedtothoseroles,andtherolesmaychange.Consideryourlastjob.
Didyourrolechangeorganicallybecauseofchangesintheworkthatneededto
bedoneorbecauseofrevisionstoyourjobdescription?
Whatif“thevirtualyou”wasinfactownedbyyou—yourpersonalavatar—
and“lived”intheblackboxofyouridentitysothatyoucouldmonetizeyour
datastreamandrevealonlywhatyouneededto,whenassertingaparticular
right.Whydoesyourdriverslicensecontainmoreinformationthanthefactthat
youhavepassedyourdrivingtestanddemonstratedyourabilitytodrive?
ImagineaneweraoftheInternetwhereyourpersonalavatarmanagesand
protectsthecontentsofyourblackbox.Thistrustysoftwareservantcould
releaseonlytherequireddetailoramountforeachsituationandatthesametime
whiskupyourdatacrumbsasyounavigatethedigitalworld.
ThismaysoundlikethestuffofsciencefictionasportrayedinfilmslikeThe
MatrixorAvatar.Buttodayblockchaintechnologiesmakeitpossible.Joe
Lubin,CEOofConsensusSystems,referstothisconceptasa“persistentdigital
IDandpersona”onablockchain.“Ishowadifferentaspectofmyselftomy
collegefriendscomparedtowhenIamspeakingattheChicagoFed,”hesaid.
“Intheonlinedigitaleconomy,Iwillrepresentmyvariousaspectsandinteract
inthatworldfromtheplatformofdifferentpersonas.”Lubinexpectstohavea
“canonicalpersona,”theversionofhimthatpaystaxes,obtainsloans,andgets
insurance.“Iwillhaveperhapsabusinesspersonaandafamilypersonato
separatetheconcernsthatIchoosetolinktomycanonicalpersona.Imayhavea
gamerpersonathatIdon’twantlinkedtomybusinesspersona.Imighteven
haveadarkwebpersonathatisneverlinkabletotheothers.”
24
Yourblackboxmayincludeinformationsuchasagovernment-issuedID,
SocialSecuritynumber,medicalinformation,serviceaccounts,financial
accounts,diplomas,practicelicenses,birthcertificate,variousothercredentials,
andinformationsopersonalyoudon’twanttorevealitbutdowanttomonetize
itsvalue,suchassexualpreferenceormedicalcondition,forapolloraresearch
study.Youcouldlicensethesedataforspecificpurposestospecificentitiesfor
specificperiodsoftime.Youcouldsendasubsetofyourattributestoyoureye
doctorandadifferentsubsettothehedgefundthatyouwouldliketoinvestin.
Youravatarcouldansweryes-noquestionswithoutdisclosingwhoyouare:“Are
youtwenty-oneyearsorolder?Didyouearnmorethan$100,000ineachofthe
lastthreeyears?Doyouhaveabodymassindexinthenormalrange?”
25
Inthephysicalworld,yourreputationislocal—yourlocalshopkeeper,your
employer,yourfriendsatadinnerpartyallhaveacertainopinionaboutyou.In
thedigitaleconomy,thereputationsofvariouspersonasinyouravatarwillbe
portable.Portabilitywillhelpbringpeopleeverywhereintothedigitaleconomy.
PeoplewithadigitalwalletandavatarinAfricacouldestablishthereputation
requiredto,say,borrowmoneytostartabusiness.“See,allthesepeopleknow
meandhavevouchedforme.Iamfinanciallytrustworthy.Iamanenfranchised
citizenoftheglobaldigitaleconomy.”
Identityisonlyasmallpartofit.Therestisacloud—anidentitycloud—of
particulateslooselyortightlylinkedtoyouridentity.Ifwetrytorecordallthese
intotheblockchain,animmutableledger,welosenotonlythenuanceofsocial
interactionbutalsothegiftofforgetting.Peopleoughtneverbedefinedbytheir
worstday.
APLANFORPROSPERITY
Inthisbook,you’llreaddozensofstoriesaboutinitiativesenabledbythistrust
protocolthatcreatenewopportunitiesforamoreprosperousworld.Prosperity
firstandforemostisaboutone’sstandardofliving.Toachieveit,peoplemust
havethemeans,tools,andopportunitiestocreatematerialwealthandthrive
economically.Butforusitincludesmore—securityoftheperson,safety,health,
education,environmentalsustainability,opportunitiestoshapeandcontrolone’s
destinyandtoparticipateinaneconomyandsociety.Inordertoachieve
prosperity,anindividualmustpossess,atminimum,accesstosomeformof
basicfinancialservicestoreliablystoreandmovevalue,communication,and
transactionaltoolstoconnecttotheglobaleconomy,andsecurity,protection,
andenforcementofthetitletolandandotherassetstheypossesslegally.
26
This
andmoreisthepromiseoftheblockchain.Thestoriesyouwillreadshouldgive
youasenseofafuturewherethereisprosperityforeveryone,notjustmore
wealthandpowerforthewealthyandpowerful.Perhapsevenaworldwherewe
ownourdataandcanprotectourprivacyandpersonalsecurity.Anopenworld
whereeveryonecancontributetoourtechnologyinfrastructure,ratherthana
worldofwalledgardenswherebigcompaniesofferproprietaryapps.Aworld
wherebillionsofexcludedpeoplecannowparticipateintheglobaleconomyand
shareinitslargesse.Here’sapreview.
CreatingaTruePeer-to-PeerSharingEconomy
PunditsoftenrefertoAirbnb,Uber,Lyft,TaskRabbit,andothersasplatformsfor
the“sharingeconomy.”It’sanicenotion—thatpeerscreateandshareinvalue.
Butthesebusinesseshavelittletodowithsharing.Infact,theyaresuccessful
preciselybecausetheydonotshare—theyaggregate.Itisanaggregating
economy.Uberisa$65billioncorporationthataggregatesdrivingservices.
Airbnb,the$25billionSiliconValleydarling,aggregatesvacantrooms.Others
aggregateequipmentandhandymenthroughtheircentralized,proprietary
platformsandthenresellthem.Intheprocess,theycollectdataforcommercial
exploitation.Noneofthesecompaniesexistedadecadeagobecausethe
technologicalpreconditionswerenotthere:ubiquitoussmartphones,fullGPS,
andsophisticatedpaymentsystems.Nowwithblockchains,thetechnologyexists
toreinventtheseindustriesagain.Today’sbigdisruptersareabouttoget
disrupted.
ImagineinsteadofthecentralizedcompanyAirbnb,adistributedapplication
—callitblockchainAirbnborbAirbnb—essentiallyacooperativeownedbyits
members.Whenarenterwantstofindalisting,thebAirbnbsoftwarescansthe
blockchainforallthelistingsandfiltersanddisplaysthosethatmeethercriteria.
Becausethenetworkcreatesarecordofthetransactionontheblockchain,a
positiveuserreviewimprovestheirrespectivereputationsandestablishestheir
identities—nowwithoutanintermediary.SaysVitalikButerin,founderofthe
Ethereumblockchain:“Whereasmosttechnologiestendtoautomateworkerson
theperipherydoingmenialtasks,blockchainsautomateawaythecenter.Instead
ofputtingthetaxidriveroutofajob,blockchainputsUberoutofajobandlets
thetaxidriversworkwiththecustomerdirectly.”
27
RewiringtheFinancialSystemforSpeedandInclusion
Thefinancialservicesindustrymakesourglobaleconomyhum,butthesystem
todayisfraughtwithproblems.Forone,itisarguablythemostcentralized
industryintheworldandthelastindustrytofeelthetransformationaleffectof
thetechnologicalrevolution.Bastionsoftheoldfinancialordersuchasbanksgo
togreatlengthstodefendmonopoliesandoftenstymiedisruptiveinnovation.
Thefinancialsystemalsorunsonoutmodedtechnologyandisgovernedby
regulationsdatingbacktothenineteenthcentury.Itisrifewithcontradictions
andunevendevelopments,makingitsometimesslow,oftentimesinsecure,and
largelyopaquetomanystakeholders.
Distributedledgertechnologycanliberatemanyfinancialservicesfromthe
confinesofoldinstitutions,fosteringcompetitionandinnovation.That’sgood
fortheenduser.EvenwhenconnectedtotheoldInternet,billionsofpeopleare
excludedfromtheeconomyforthesimplereasonthatfinancialinstitutionsdon’t
provideserviceslikebankingtothembecausetheywouldbeunprofitableand
riskycustomers.Withtheblockchainthesepeoplecannotonlybecome
connected,butmoreimportantbecomeincludedinfinancialactivity,ableto
purchase,borrow,sell,andotherwisehaveachanceatbuildingaprosperouslife.
Similarlyincumbentinstitutionscantransformthemselvesaround
blockchaintechnology,iftheycanfindtheleadershiptodoit.Thetechnology
holdsgreatpromisetorevolutionizetheindustryforthegood—frombanksto
stockexchanges,insurancecompaniestoaccountingfirms,brokerages,
microlenders,creditcardnetworks,realestateagents,andeverythingin
between.Wheneveryonesharesthesamedistributedledger,settlementsdon’t
takedays,theyoccurinstantlyforalltosee.Billionswillbenefit,andthisshift
couldliberateandempowerentrepreneurseverywhere.
ProtectingEconomicRightsGlobally
Propertyrightsaresoinexorablytiedtooursystemofcapitalistdemocracythat
Jefferson’sfirstdraftoftheDeclarationofIndependencelistedtheinalienable
rightsofmanaslife,liberty,andthepursuitofproperty,nothappiness.
28
While
thoseaspirationaltenetslaidthegroundworkforthemoderneconomyand
societyweenjoyinmuchofthedevelopedworld,tothisdaymuchofthe
world’spopulationdoesnotreaptheirbenefits.Eventhoughsomeprogresshas
beenmadeinthedepartmentsoflifeandliberty,amajorityoftheworld’s
propertyholderscanhavetheirhomesortheirbitoflandseizedarbitrarilyby
corruptgovernmentfunctionaries,withtheflickofasoftwareswitchintheir
centralizedgovernmentpropertydatabase.Withoutproofofpropertyownership,
landownerscan’tsecurealoan,getabuildingpermit,orsellthepropertyand
theycanbeexpropriated—allseriousimpedimentstoprosperity.
PeruvianeconomistandpresidentoftheInstituteforLibertyandDemocracy
HernandodeSoto,oneoftheworld’sforemosteconomicminds,suggeststhatas
manyasfivebillionpeopleintheworldarebarredfromparticipatingfullyinthe
valuecreatedthroughglobalizationbecausetheyhaveatenuousrighttotheir
land.Blockchain,heargues,couldchangeallthat.“Thecentralideato
blockchainisthattherightstogoodscanbetransacted,whethertheybe
financial,hardassetsorideas.Thegoalisnotmerelytorecordtheplotofland
butrathertorecordtherightsinvolvedsothattherightsholdercannotbe
violated.”
29
Universalpropertyrightscouldlaythegroundworkforanew
agendaofglobaljustice,economicgrowth,prosperity,andpeace.Inthisnew
paradigm,rightsareprotected,notbygunsormilitiasorminutemen,butby
technology.“Blockchainisforaworldthat’sgovernedbyrealthingsinsteadof
fictitiousthings.AndIthinkthat’sgood,”
30
saiddeSoto.Andit’sdecentralized.
Nocentralauthoritycontrolsit,everybodyknowswhat’shappening,andit
remembersforever.
EndingtheRemittanceRip-off
Justabouteveryreport,article,orbookreviewingthebenefitsof
cryptocurrenciesdiscussestheopportunityofremittances.Andforgoodreason.
Thelargestflowoffundsintothedevelopingworldisnotforeignaidordirect
foreigninvestment.Rather,itisremittancemoneyrepatriatedtopoorcountries
fromtheirdiasporaslivingabroad.Theprocesstakestime,patience,and
sometimescouragetotraveleachweektothesamewiretransferoffice’sseedy
neighborhood,filloutthesamepaperworkeachtime,andpaythesame7
percentfee.Thereisabetterway.
Abraandothercompaniesarebuildingpaymentnetworksusingthe
blockchain.Abra’sgoalistoturneveryoneofitsusersintoateller.Thewhole
process—fromthefundsleavingonecountrytotheirarrivinginanother—takes
anhourratherthanaweekandcosts2percentversus7percentorhigher.Abra
wantsitspaymentnetworktooutnumberallphysicalATMsintheworld.Ittook
WesternUnion150yearstogetto500,000agentsworldwide.Abrawillhave
thatmanytellersinitsfirstyear.
CuttingOutBureaucracyandCorruptioninForeignAid
Couldblockchainsolveproblemswithforeignaid?The2010Haitiearthquake
wasoneofthedeadliestnaturaldisastersinrecordedhistory.Somewhere
between100,000and300,000peopleperished.ThegovernmentinHaitiproved
itselfaliabilityintheaftermath.Theglobalcommunitydonatedmorethan$500
milliontotheRedCross,aknownbrand.Anafter-actioninvestigationrevealed
thatfundsweremisspentorwentmissingaltogether.
Theblockchaincanimprovethedeliveryofforeignaidbyeliminatingthe
middlemenwhotaketheaidbeforeitreachesitsdestination.Second,asan
immutableledgeroftheflowoffunds,blockchainholdsinstitutionsmore
accountablefortheiractions.Imagineifyoucouldtrackeachdollaryougaveto
theRedCrossfromitsstartingpointonyoursmartphonetothepersonit
benefited.Youcouldparkyourfundsinescrow,releasingamountsaftertheRed
Crossreachedeachmilestone.
FeedingtheCreatorsofValueFirst
UnderthefirstgenerationoftheInternet,manycreatorsofintellectualproperty
didnotreceivepropercompensationforit.ExhibitAwasmusiciansand
composerswhohadsignedwithrecordlabelswhoseleadersfailedtoimagine
howtheInternetwouldaffecttheirindustry.Theyfailedtoembracethedigital
ageandreinventtheirownbusinessmodels,slowlycedingcontroltoinnovative
onlinedistributors.
Considerthemajorlabels’reactiontoNapster,thepeer-to-peermusicfile-
sharingplatformlaunchedin1999.Incumbentsinthemusicindustryteamedup
tosuethenewventure,itsfounders,andeighteenthousandofitsusers,
dismantlingtheplatformbyJuly2001.AlexWinter,directorofadocumentary
onNapster,toldTheGuardian,“Ihaveaproblemwithblack-and-whitethinking
whenitcomestobigculturalchanges....WithNapster,therewasanenormous
amountofgrey”betweenthe‘IcanshareeverythingI’vepaidforpositionand
the‘You’reacriminalevenifyoushareonlyoneofthefilesyou’vepurchased’
pointofview.”
31
Weagree.Cocreatingwithconsumersisusuallyamoresustainablebusiness
modelthansuingthem.Thewholeincidentturnedahugehotspotlightonthe
musicindustry,exposingitsoutdatedmarketingpractices,grossdistribution
inefficiencies,andwhatsomeinterpretedasantimusicianpolicies.
Verylittlehaschangedsincethen.Untilnow.Welookatthenewmusic
ecosystememergingontheblockchain,ledbyBritishsinger-songwriterImogen
Heap,cellistZoëKeating,andblockchaindevelopersandentrepreneurs.Every
culturalindustryisupfordisruption,andthepromiseisthatcreatorsgetfully
compensatedforthevaluetheycreate.
ReconfiguringtheCorporationastheEngineofCapitalism
Withtheriseofaglobalpeer-to-peerplatformforidentity,trust,reputation,and
transactions,wewillfinallybeabletore-architectthedeepstructuresofthefirm
forinnovation,shared-valuecreation,andperhapsevenprosperityforthemany,
ratherthanjustwealthforthefew.Thisdoesn’tmeansmallerfirmsintermsof
revenueorimpact.Tothecontrary,we’retalkingaboutbuildingtwenty-first-
centurycompanies,somethatmaybemassivewealthcreatorsandpowerfulin
theirrespectivemarkets.Wedothinkenterpriseswilllookmorelikenetworks
ratherthantheverticallyintegratedhierarchiesoftheindustrialage.Assuch
thereisanopportunitytodistribute(notredistribute)wealthmore
democratically.
We’llalsotakeyouonastrollthroughthemind-bogglingworldofsmart
contracts,newautonomouseconomicagents,andwhatwecalldistributed
autonomousenterpriseswhereintelligentsoftwaretakesoverthemanagement
andorganizationofmanyresourcesandcapabilities,perhapsdisplacing
corporations.Smartcontractsenablethecreationofwhatwecallopen
networkedenterprisesbasedonanewsetofbusinessmodels,oroldbusiness
modelswithablockchaintwist.
AnimatingObjectsandPuttingThemtoWork
Technologistsandsciencefictionwritershavelongenvisionedaworldwherea
seamlessglobalnetworkofInternet-connectedsensorscouldcaptureevery
event,action,andchangeonearth.Blockchaintechnologywillenablethingsto
collaborate,exchangeunitsofvalue—energy,time,andmoney—and
reconfiguresupplychainsandproductionprocessesaccordingtoshared
informationondemandandcapacity.Wecanattachmetadatatosmartdevices
andprogramthemtorecognizeotherobjectsbytheirmetadataandtoactorreact
todefinedcircumstanceswithoutriskoferrorortampering.
Asthephysicalworldcomestolife,everyonecanprosper—fromsmall
farmersintheAustralianoutbackwhoneedelectricalpowerfortheirbusinesses
tohomeownerseverywherewhocanbecomepartofadistributedblockchain
powergrid.
CultivatingtheBlockchainEntrepreneur
Entrepreneurshipisessentialtoathrivingeconomyandaprosperoussociety.
TheInternetwassupposedtoliberateentrepreneurs,givingthemthetoolsand
capabilitiesofbigcompanieswithoutmanyoftheliabilities,suchaslegacy
culture,ossifiedprocesses,anddeadweight.However,thehigh-flyingsuccessof
dot-combillionairesobfuscatesanunsettlingtruth:entrepreneurshipandnew
businessstartshavebeensteadilydecliningforthirtyyearsinmanydeveloped
economies.
32
Inthedevelopingworld,theInternethasdonelittletolowerthe
barriersofwould-beentrepreneurswhomustsufferdeadeninggovernment
bureaucracies.TheInternethasalsonotliberatedthefinancialtoolsessentialto
startingabusinessavailabletobillionsofpeople.Noteveryoneisdestinedtobe
anentrepreneur,ofcourse,butevenfortheaveragepersontryingtoearna
decentwage,thelackoffinancialtoolsandtheprevalenceofgovernmentred
tapemakedoingsochallenging.
Thisisacomplexissue,butblockchaincanhelpsupercharge
entrepreneurshipandthereforeprosperityinmanyimportantways.Forthe
averagepersonlivinginthedevelopingworldtohaveareliablestoreofvalue
andawaytoconductbusinessbeyondhiscommunity,allheneedsnowisan
Internet-enableddevice.Accesstotheglobaleconomymeansgreateraccessto
newsourcesofcredit,funding,suppliers,partners,andinvestmentopportunities.
Notalentorresourceistoosmalltomonetizeontheblockchain.
RealizingGovernmentsbythePeopleforthePeople
Buckleupforbigchangesingovernmentandgovernancetoo.Blockchain
technologyisalreadyrevolutionizingthemachineryofgovernmentandhowwe
canmakeithighperformance—betterandcheaper.It’salsocreatingnew
opportunitiestochangedemocracyitself—howgovernmentscanbemoreopen
andfreefromlobbyistcontrol,andbehavewiththefourvaluesofintegrity.We
lookathowblockchaintechnologiescanchangewhatitmeanstobeacitizen
andparticipateinthepoliticalprocess,fromvotingandaccessingsocialservices
tosolvingsomeofsociety’sbighairyproblemsandholdingelected
representativesaccountableforthepromisesthatgotthemelected.
PROMISEANDPERILOFTHENEWPLATFORM
Iftherearesixmillionpeopleinthenakedcity,
33
thentherearesixmillion
obstaclestothistechnologyfulfillingitspotential.Further,therearesome
worrisomedownsides.Somesaythetechnologyisnotreadyforprimetime;that
it’sstillhardtouse,andthatthekillerapplicationsarenascent.Othercritics
pointtothemassiveamountofenergyconsumedtoreachconsensusinjustthe
bitcoinnetwork:Whathappenswhenthousandsorperhapsmillionsof
interconnectedblockchainsareeachprocessingbillionsoftransactionsaday?
Aretheincentivesgreatenoughforpeopletoparticipateandbehavesafelyover
time,andnottrytooverpowerthenetwork?Isblockchaintechnologytheworst
jobkillerever?
Thesearequestionsofleadershipandgovernance,notoftechnology.The
firsteraoftheInternettookoffbecauseofthevisionandcommoninterestsofits
keystakeholders—governments,civilsocietyorganizations,developers,and
everydaypeoplelikeyou.Blockchainrequiressimilarleadership.Wediscussat
greaterlengthinthebookwhyleadersofthisnewdistributedparadigmwill
needtostaketheirclaimandunleashawaveofeconomicandinstitutional
innovation,toensurethistimethatthepromiseisfulfilled.Weinviteyoutobe
oneofthese.
Thisbookgrewoutofthe$4millionGlobalSolutionNetworksprogramat
theRotmanSchoolofManagementattheUniversityofToronto.Funded
primarilybylargetechnologycorporationsalongwiththeRockefellerandSkoll
foundations,theU.S.StateDepartment,andIndustryCanada,theinitiative
explorednewapproachestoglobalproblemsolvingandgovernance.Wewere
bothinvolvedinrunningtheprogram.(Donfoundedit;Alexledtheprojecton
cryptocurrencies.)In2014,welaunchedaone-yearinitiativeontheblockchain
revolutionanditsimplicationsforbusinessandsociety,culminatinginthisbook.
Init,wehaveattemptedtoputthepromiseandtheperilofthenewplatforminto
perspective.
Ifbusiness,government,andcivilsocietyinnovatorsgetthisright,wewill
movefromanInternetdrivenprimarilybythefallingcostsofsearch,
coordination,datacollection,anddecisionmaking—wherethenameofthegame
wasmonitoring,mediating,andmonetizinginformationandtransactionsonthe
Web—toonedrivenbythefallingcostsofbargaining,policing,andenforcing
socialandcommercialagreements,wherethenameofthegamewillbeintegrity,
security,collaboration,theprivacyofalltransactions,andthecreationand
distributionofvalue.That’sa180-degreeturninstrategy.Theresultcanbean
economyofpeerswithinstitutionsthataretrulydistributed,inclusive,and
empowering—andtherebylegitimate.Byfundamentallychangingwhatwecan
doonline,howwedoit,andwhocanparticipate,thenewplatformmayeven
createthetechnologicalpreconditionstoreconcilingsomeofourmostvexing
socialandeconomicchallenges.
Ifwegetthiswrong,blockchaintechnology,whichholdssomuchpromise,
willbeconstrainedorevencrushed.Worse,itcouldbecomeatoolpowerful
institutionsusetoentrenchtheirwealthor,ifhackedbygovernments,aplatform
forsomekindofnewsurveillancesociety.Thetightlyrelatedtechnologiesof
distributedsoftware,cryptography,autonomousagents,andevenartificial
intelligencecouldgetoutofcontrolandturnagainsttheirhumanprogenitors.
Itispossiblethatthisnewtechnologymaybedelayed,stalled,underutilized,
orworse.Theblockchainandcryptocurrencies,particularlybitcoin,alreadyhave
massivemomentum,butwe’renotpredictingwhetherornotallthiswill
succeed,andifitdoes,howfastitwilloccur.
34
Predictionisalwaysarisky
business.SaystechnologytheoristDavidTicoll:“Manyofusdidabadjobof
predictingthefullimpactoftheInternet.ISIStypebadphenomenaareamong
whatwemissed,andsomebigoptimisticpredictionsturnedoutwrong.”He
says,“IftheblockchainisasbiganduniversalastheNet,wearelikelytodoa
comparablybadjobofpredictingbothitsupsidesanddownsides.”
35
Soratherthanpredictingablockchainfuture,we’readvocatingforit.We’re
arguingthatitshouldsucceed,becauseitcouldhelpususherinaneweraof
prosperity.Webelievethattheeconomyworksbestwhenitworksforeveryone,
andthisnewplatformisanengineofinclusion.Itdrasticallylowersthecostof
transmittingsuchfundsasremittances.Itsignificantlylowersthebarrierto
havingabankaccount,obtainingcredit,andinvesting.Anditsupports
entrepreneurshipandparticipationinglobaltrade.Itcatalyzesdistributed
capitalism,notjustaredistributedcapitalism.
Everyoneshouldstopfightingitandtaketherightstepstogetonboard.
Let’sharnessthisforcenotfortheimmediatebenefitofthefewbutforthe
lastingbenefitofthemany.
Today,bothofusareexcitedaboutthepotentialofthisnextroundofthe
Internet.We’reenthusiasticaboutthemassivewaveofinnovationthatisbeing
unleashedanditspotentialforprosperityandabetterworld.Thisbookisour
casetoyoutobecomeinterested,understandthisnextwave,andtakeactionto
ensurethatthepromiseisfulfilled.
Sohangontoyourseatandreadon!We’reatoneofthosecriticaljunctures
inhumanhistory.
F
CHAPTER2
BOOTSTRAPPINGTHEFUTURE:
SEVENDESIGNPRINCIPLESOFTHE
BLOCKCHAINECONOMY
reedomispredicatedonprivacy,”saidAnnCavoukian,executivedirectorof
thePrivacyandBigDataInstituteatRyersonUniversity.“Ifirstlearnedthat
thirtyyearsagowhenIstartedgoingtoconferencesinGermany.Itisnoaccident
thatGermanyistheleadingprivacyanddataprotectioncountryintheworld.
TheyhadtoenduretheabusesoftheThirdReichandthecompletecessationof
alloftheirfreedoms,whichstartedwiththecompleteremovaloftheirprivacy.
Whenthatended,theysaid,‘Neveragain.’”
1
Andsoitisironic—ortotallyfitting—thatoneofthefirstdecentralized
peer-to-peercomputationalplatformstoguaranteeuserprivacyiscalledEnigma,
alsothenamegiventothemachinedevelopedbyGermanengineerArthur
Scherbiustotranscribecodedinformation.ScherbiusdesignedEnigmafor
commercialuse:throughhisdevice,globalcompaniescouldquicklyandsafely
communicatetheirtradesecrets,stocktips,andotherinsiderinformation.Within
afewyears,Germany’smilitaryforcesweremanufacturingtheirownversions
ofEnigmatobroadcastcodedmessagesoverradiototroops.Duringthewar,the
NazisusedEnigmatodisseminatestrategicplans,detailsoftargets,andthe
timingofattacks.Itwasatoolofsufferingandoppression.
OurcontemporaryEnigmaisatooloffreedomandprosperity.Designedat
MITMediaLabbyGuyZyskindandOzNathan,thenewEnigmacombinesthe
virtuesofblockchain’spublicledger,thetransparencyofwhich“providesstrong
incentivesforhonestbehavior,”withsomethingknownashomomorphic
encryptionandsecuremultipartycomputation.
2
Moresimplyput,“Enigmatakes
yourinformation—anyinformation—breaksitup,andencryptsitintopiecesof
datathatarerandomlydistributedtonodesinthenetwork.Itdoesn’texistinone
spot,”saidCavoukian.“Enigmausesblockchaintechnologytoembedthedata
andtrackallthepiecesofinformation.”
3
Youcanshareitwiththirdpartiesand
thosepartiescanuseitincomputationswithouteverdecryptingit.
4
Ifitworks,it
couldreshapehowweapproachourownidentityonline.Imaginehavingablack
boxofyourpersonalinformationthatyoualonecontrolandcanaccess.
Nomatterhowcoolitmaysound,therearereasonstotreadcautiouslyon
thecryptographicfrontier.First,itneedstobootstrapalargenetworkof
participants.Second,“cryptographyisanareawhereyouneverwanttobeusing
thenewestandgreatest,becausethereisanentirehistoryofanalgorithmthat
everyonebelievesissecure,that’soutthereforfourorfiveyears,andsomevery
inspiredscientistwillcomeoutandsay,there’saflaw,andtheentirething
tumbles,”saidAustinHillofBlockstream.“That’swhywegenerallyprefer
conservative,verywell-established,long-standingalgorithms.Thisstuffisvery,
verywellfuture-proofed,andbitcoinwasdesignedwiththatinmind.”
5
Still,theconceptisworthtakingveryseriously,asithasprofound
implicationsforprivacy,security,andsustainability.“Enigmaisofferingwhat
theysayguaranteesprivacy,”Cavoukiansaid.“Thatisabigclaim,butthat’sthe
kindofthingweincreasinglyneedinthisconnected,interconnectedworld.”
6
Inourresearch,wecameacrossanumberofprojectsinitiatedonblockchain
technologieswhosedevelopershadsimilaraspirationsforenablingbasichuman
rights—notonlytherightstoprivacyandsecurity,butalsotherightstoproperty,
recognitionasapersonunderthelaw,andparticipationingovernment,culture,
andtheeconomy.Imagineatechnologythatcouldpreserveourfreedomto
chooseforourselvesandourfamilies,toexpressthesechoicesintheworld,and
tocontrolourowndestiny,nomatterwherewelivedorwereborn.Whatnew
toolsandnewjobscouldwecreatewiththosecapabilities?Whatnewbusinesses
andservices?Howshouldwethinkabouttheopportunities?Theanswerswere
rightinfrontofus,complimentsofSatoshiNakamoto.
THESEVENDESIGNPRINCIPLES
WebelievethatthisnexteracouldbeinspiredbySatoshiNakamoto’svision,
designedaroundasetofimplicitprinciples,andrealizedbythecollaborative
spiritofmanypassionateandequallytalentedleadersinthecommunity.
Hisgrandvisionwaslimitedtomoney,nottosomegreatergoalofcreatinga
secondgenerationoftheInternet.Therewasnodiscussionofreinventingthe
firm,changingourinstitutions,ortransformingcivilizationforthebetter.Still,
Satoshi’svisionwasstunninginitssimplicity,originality,andinsightinto
humankind.Itbecamecleartothosewhoreadthe2008paperthataneweraof
thedigitaleconomywasabouttobegin.Wherethefirsteraofthedigital
economywassparkedbyaconvergenceofcomputingandcommunications
technologies,thisseconderawouldbepoweredbyaclevercombinationof
computerengineering,mathematics,cryptography,andbehavioraleconomics.
FolksingerGordonLightfootcrooned,“Ifyoucouldreadmymind,love,
whatatalemythoughtscouldtell.”Satoshihasbeenincommunicadosince2011
(thoughthenamepopsupondiscussionboardsfromtimetotime),butwethink
thetrustprotocolhebootstrappedlendsitselftoprinciplesforreconfiguringour
institutionsandeconomy.
Everyonewetalkedtohasbeeneagertoshareinsightsintoblockchain
technologywithus.Eachconversation,eachwhitepaper,eachforumthreadhas
surfacedanumberofthemesthatwe’vereverse-engineeredintodesign
principles—principlesforcreatingsoftware,services,businessmodels,markets,
organizations,andevengovernmentsontheblockchain.Satoshineverwrote
abouttheseprinciples,buttheyareimplicitinthetechnologyplatformhe
unleashed.Weseethemasprinciplesforshapingthenexteraofthedigital
economy,andaneraofrenewedtrust.
Ifyou’renewtothisspace,wehopetheseprincipleswillhelpyou
understandthebasicsoftheblockchainrevolution.Ifyou’readie-hardskeptic
ofthebitcoinblockchain,theyshouldstillserveyouasyoucontemplateyour
futureasanentrepreneur,inventor,engineer,orartistwhoseekscreative
collaborationswithlike-mindedpeople;asanownerorinvestorinassetsofall
kinds;orasamanagerwhowantstoreimagineyourroleinthisnascent
blockchaineconomy.
1.NetworkedIntegrity
Principle:Trustisintrinsic,notextrinsic.Integrityisencodedineverystepof
theprocessanddistributed,notvestedinanysinglemember.Participantscan
exchangevaluedirectlywiththeexpectationthattheotherpartywillactwith
integrity.Thatmeansthatthevaluesofintegrity—honestyinone’swordsand
deeds,considerationforothers’interests,accountabilityfortheconsequencesof
one’sdecisionsandactions,andtransparencyindecisionmakingandaction
taking—arecodedindecisionrights,incentivestructures,andoperationssothat
actingwithoutintegrityeitherisimpossibleorcostsalotmoretime,money,
energy,andreputation.
ProblemtoBeSolved:OntheInternet,peoplehaven’tbeenabletotransact
ordobusinessdirectlyforthesimplereasonthatmoneyisn’tlikeother
informationgoodsandintellectualpropertyperse.Youcansendthesameselfie
toallyourfriends,butyououghtnotgiveyourfriendadollarthatyou’ve
alreadygiventosomeoneelse.Themoneymustleaveyouraccountandgointo
yourfriend’s.Itcan’texistinbothplaces,letalonemultipleplaces.Andso
there’sariskofyourspendingaunitofdigitalcurrencyintwoplacesandhaving
oneofthembouncelikeabadcheck.That’scalledthedouble-spendproblem.
That’sgoodforfraudsterswhowanttospendtheirmoneytwice.It’sbadforthe
recipientofthebouncedamountandbadforyourreputationonline.
Traditionally,whenmakingonlinepayments,wesolvethedouble-spend
problembyclearingeverytransactionthroughthecentraldatabasesofoneor
manythirdparties,suchasamoneytransferservice(likeWesternUnion),a
commercialbank(Citicorp),agovernmentbody(CommonwealthBankof
Australia),acreditcardcompany(Visa),oranonlinepaymentplatform
(PayPal).Settlementcantakedaysorevenweeksinsomepartsoftheworld.
Breakthrough:Satoshileveragedanexistingdistributedpeer-to-peer
networkandabitofclevercryptographytocreateaconsensusmechanismthat
couldsolvethedouble-spendproblemaswellas,ifnotbetterthan,atrusted
thirdparty.Onthebitcoinblockchain,thenetworktime-stampsthefirst
transactionwheretheownerspendsaparticularcoinandrejectssubsequent
spendsofthecoin,thuseliminatingadoublespend.Networkparticipantswho
runfullyoperatingbitcoinnodes—calledminers—gatheruprecenttransactions,
settlethemintheformofablockofdata,andrepeattheprocesseveryten
minutes.Eachblockmustrefertotheprecedingblocktobevalid.Theprotocols
alsoincludeamethodforreclaimingdiskspacesothatallnodescanefficiently
storethefullblockchain.Finally,theblockchainispublic.Anyonecansee
transactionstakingplace.Noonecanhideatransaction,andthatmakesbitcoin
moretraceablethancash.
Satoshisoughtnotonlytodisintermediatethecentralbankingpowersbut
alsotoeliminatetheambiguityandconflictinginterpretationsofwhathappened.
Letthecodespeakforitself.Letthenetworkreachconsensusalgorithmicallyon
whathappenedandrecorditcryptographicallyontheblockchain.The
mechanismforreachingconsensusiscritical.“Consensusisasocialprocess,”
bloggedVitalikButerin,pioneeroftheEthereumblockchain.“Humanbeingsare
fairlygoodatengaginginconsensus...withoutanyhelpfromalgorithms.”He
explainedthat,onceasystemscalesbeyondanindividual’sabilitytodothe
math,peopleturntosoftwareagents.Inpeer-to-peernetworks,theconsensus
algorithmdivviesuptherighttoupdatethestatusofthenetwork,thatis,tovote
onthetruth.Thealgorithmdolesoutthisrighttoagroupofpeerswhoconstitute
aneconomicset,asetthathasskininthegame,sotospeak.Accordingto
Buterin,what’simportantaboutthiseconomicsetisthatitsmembersare
securelydistributed:nosinglememberorcartelshouldbeabletoovertakea
majority,eveniftheyhadthemeansandincentivetodoso.
7
Toachieveconsensus,thebitcoinnetworkuseswhat’scalledaproofofwork
(PoW)mechanism.Thismaysoundcomplicatedbuttheideaisasimpleone.
Becausewecan’trelyontheidentityoftheminerstoselectwhocreatesthenext
block,weinsteadcreateapuzzlethatishardtosolve(i.e.,ittakesalotofwork),
buteasytoverify(i.e.,everyoneelsecanchecktheanswerveryquickly).
Participantsagreethatwhoeversolvestheproblemfirstgetstocreatethenext
block.Minershavetoexpendresources(computinghardwareandelectricity)to
solvethepuzzlebyfindingtherighthash,akindofuniquefingerprintforatext
oradatafile.Foreachblocktheyfind,minersreceivebitcoinasareward.The
puzzleismathematicallysetuptomakeitimpossibletofindashortcuttosolve
it.That’swhy,whentherestofthenetworkseestheanswer,everyonetruststhat
alotofworkwentintoproducingit.Also,thispuzzlesolvingiscontinuous“to
thetuneof500,000trillionhashespersecond,”accordingtoDinoMark
Angaritis.Minersare“lookingforahashthatmeetsthetarget.Itisstatistically
boundtooccureverytenminutes.It’saPoissonprocess,sothatsometimesit
takesoneminuteandsometimesonehour,butonaverage,it’stenminutes.”
Angaritisexplainedhowitworks:“Minersgatherallthependingtransactions
thattheyfindonthenetworkandrunthedatathroughacryptographicdigest
functioncalledthesecurehashalgorithm(SHA-256),whichoutputsa32-byte
hashvalue.Ifthehashvalueisbelowacertaintarget(setbythenetworkand
adjustedevery2,016blocks),thentheminerhasfoundtheanswertothepuzzle
andhas‘solved’theblock.Unfortunatelyfortheminer,findingtherighthash
valueisverydifficult.Ifthehashvalueiswrong,themineradjuststheinputdata
slightlyandtriesagain.Eachattemptresultsinanentirelydifferenthashvalue.
Minershavetotrymanytimestofindtherightanswer.AsofNovember2015,
thenumberofhashattemptsisonaverage350milliontrillion.That’salotof
work!”
8
Youmayhearaboutotherconsensusmechanisms.Thefirstversionofthe
Ethereumblockchain—Frontier—alsousesproofofwork,butthedevelopersof
Ethereum1.1expecttoreplaceitwithaproofofstakemechanism.Proofof
stakerequiresminerstoinvestinandhangontosomestoreofvalue(i.e.,the
nativetokenoftheblockchainsuchasPeercoin,NXT,etc.).Theyneedn’tspend
energytovote.Otherblockchains,suchasRippleandStellar,relyonsocial
networksforconsensusandmayrecommendthatnewparticipants(i.e.,new
nodes)generateauniquenodelistofatleastonehundrednodestheycantrustin
votingonthestateofaffairs.Thistypeofproofisbiased:newcomersneedsocial
intelligenceandreputationtoparticipate.Proofofactivityisanothermechanism;
itcombinesproofofworkandproofofstake,wherearandomnumberofminers
mustsignoffontheblockusingacryptokeybeforetheblockbecomesofficial.
9
Proofofcapacityrequiresminerstoallotasizablevolumeoftheirharddriveto
mining.Asimilarconcept,proofofstorage,requiresminerstoallocateandshare
diskspaceinadistributedcloud.
Storagedoesmatter.Dataonblockchainsaredifferentfromdataonthe
Internetinoneimportantway.OntheInternet,mostoftheinformationis
malleableandfleeting,andtheexactdateandtimeofitspublicationisn’tcritical
topastorfutureinformation.Ontheblockchain,bitcoinmovementacrossthe
networkispermanentlystamped,fromthemomentofitscoinage.Forabitcoin
tobevalid,itmustreferenceitsownhistoryaswellasthehistoryofthe
blockchain.Therefore,theblockchainmustbepreservedinitsentirety.
Soimportantaretheprocessesofmining—assemblingablockof
transactions,spendingsomeresource,solvingtheproblem,reachingconsensus,
maintainingacopyofthefullledger—thatsomehavecalledthebitcoin
blockchainapublicutilityliketheInternet,autilitythatrequirespublicsupport.
PaulBrodyofErnst&Youngthinksthatallourappliancesshoulddonatetheir
processingpowertotheupkeepofablockchain:“Yourlawnmoweror
dishwasherisgoingtocomewithaCPUthatisprobablyathousandtimesmore
powerfulthanitactuallyneeds,andsowhynothaveitmine?Notforthe
purposeofmakingyoumoney,buttomaintainyourshareoftheblockchain,”
10
hesaid.Regardlessoftheconsensusmechanism,theblockchainensures
integritythroughclevercoderatherthanthroughhumanbeingswhochooseto
dotherightthing.
ImplicationsfortheBlockchainEconomy:Ratherthantrustingbig
companiesandgovernmentstoverifypeople’sidentitiesandvouchfortheir
reputations,wecantrustthenetwork.Forthefirsttimeever,wehaveaplatform
thatensurestrustintransactionsandmuchrecordedinformationnomatterhow
theotherpartyacts.
Theimplicationsformostsocial,political,andeconomicactivityare
staggering.It’snotjustaboutwhomarriedwhom,whovotedforwhom,who
paidwhom,it’saboutanyendeavorthatrequirestrustedrecordsandassured
transactions.Whoownswhat?Whoholdswhichrightstothisintellectual
property?Whograduatedfrommedicalschool?Whoboughtguns?Whomade
theseNikeshoes,thisAppledevice,orthisbabyformula?Wheredidthese
diamondscomefrom?Trustisthesinequanonofthedigitaleconomy,anda
platformforsecureandreliablemasscollaborationholdsmanypossibilitiesfora
newkindoforganizationandsociety.
2.DistributedPower
Principle:Thesystemdistributespoweracrossapeer-to-peernetworkwithno
singlepointofcontrol.Nosinglepartycanshutthesystemdown.Ifacentral
authoritymanagestoblackoutorcutoffanindividualorgroup,thesystemwill
stillsurvive.Ifoverhalfthenetworkattemptstooverwhelmthewhole,everyone
willseewhat’shappening.
ProblemtoBeSolved:InthefirsteraoftheInternet,anylargeinstitution
withalargeestablishedbaseofusers,betheyemployees,citizens,customers,or
otherorganizations,thoughtlittleoftheirsocialcontract.Timeandtimeagain,
centralpowershaveproventhatthey’rewillingandabletooverrideusers,
warehouseandanalyzeuserdata,respondtogovernmentrequestsfordata
withoutusers’knowledge,andimplementlarge-scalechangeswithoutusers’
consent.
Breakthrough:Theenergycostsofoverpoweringthebitcoinblockchain
wouldoutweighthefinancialbenefits.Satoshideployedaproof-of-workmethod
thatrequiresuserstoexpendalotofcomputingpower(whichrequiresalotof
electricity)todefendthenetworkandmintnewcoins.Hewasinspiredby
cryptographerAdamBack’ssolution,Hashcash,tomitigatespamanddenial-of-
serviceattacks.Back’smethodrequirede-mailerstoprovideproofofworkwhen
sendingthemessage.Itineffectstamped“specialdelivery”onane-mailto
signalthemessage’simportancetoitssender.“Thismessageissocriticalthat
I’vespentallthisenergyinsendingittoyou.”Itincreasesthecostsofsending
spam,malware,andransomware.
Anyonecandownloadthebitcoinprotocolforfreeandmaintainacopyof
theblockchain.Itleveragesbootstrapping,atechniqueforuploadingthe
programontoavolunteerscomputerormobiledevicethroughafewsimple
instructionsthatsettherestoftheprograminmotion.It’sfullydistributedacross
avolunteernetworklikeBitTorrent,ashareddatabaseofintellectualproperty
thatresidesontensofthousandsofcomputersworldwide.
Tobesure,thisshieldsthenetworkfromthehandsofthestate,whichcould
begoodorbaddependingonthesituation—sayadissidentinatotalitarian
countryfightingforwomen’srightsversusacriminalinademocraticcountry
conductingextortion.Totalitarianregimescouldnotfreezebankaccountsor
seizefundsofpoliticalactivists.Statescouldnotarbitrarilyseizeassetsonthe
blockchainasFranklinDelanoRoosevelt’sadministrationdidthroughFDR’s
ExecutiveOrder6102,whichrequiredcitizenstoturntheir“goldcoin,gold
bullion,andgoldcertificates”overtothegovernmentorriskfinesor
imprisonment.
11
JoshFairfieldofWashingtonandLeeUniversityputitbluntly:
“There’snomiddlemantogoafteranymore.”
12
Theblockchainresides
everywhere.Volunteersmaintainitbykeepingtheircopyoftheblockchainupto
dateandlendingtheirsparecomputerprocessingunitsformining.Nobackdoor
dealing.Everyactionortransactionisbroadcastacrossthenetworkfor
subsequentverificationandvalidation.Nothingpassesthroughacentralthird
party;nothingisstoredonacentralserver.
Satoshialsodistributedthemintbylinkingtheissuanceofbitcoinstothe
creationofanewblockintheledger,puttingthepowertomintintoallthehands
ofthepeernetwork.Whicheverminersolvedthepuzzleandsubmittedproofof
workfirstcouldreceiveanumberofnewbitcoins.ThereisnoFederalReserve,
centralbank,ortreasurywithcontroloverthemoneysupply.Moreover,each
bitcoincontainsdirectlinkstoitsgenesisblockandallsubsequenttransactions.
Sonointermediariesarerequired.Thefunctioningoftheblockchainismass
collaborationatitsbest.Youhavepoweroveryourdata,yourproperty,andyour
levelofparticipation.It’sdistributedcomputingpowerenablingdistributedand
collectivehumanpower.
ImplicationsfortheBlockchainEconomy:Perhapssuchaplatformcould
enablenewdistributedmodelsofwealthcreation.Perhapsnewkindsofpeer-to-
peercollaborationscouldtargethumanity’smostvexingsocialproblems.
Perhapswecouldsolvethecrisisofconfidenceandevenlegitimacyintoday’s
institutionsbyshiftingrealpowertowardcitizens,equippingthemwithreal
opportunitiesforprosperityandparticipationinsociety,ratherthanthroughPR
trickery.
3.ValueasIncentive
Principle:Thesystemalignstheincentivesofallstakeholders.Bitcoinorsome
tokenofvalueisintegraltothisalignmentandcorrelativeofreputation.Satoshi
programmedthesoftwaretorewardthosewhoworkonitandbelongtothose
whoholdanduseitstokens,sothattheyalltakecareofit.Sortoftheultimate
Tamagotchi,theblockchainisagloballydistributednestegg.
13
ProblemtoBeSolved:InthefirsteraoftheInternet,theconcentrationof
powerincorporations,combinedwiththeirsheersize,complexity,andopacity,
enabledthemtoextractdisproportionatevaluefromtheverynetworksthat
endowedthemwithrights.Largebanksexploitedthefinancialsystemtoits
breakingpointbecause“incentivestructuresformostofthetopexecutivesand
manyofthelendingofficersofthesebanks[were]designedtoencourageshort-
sightedbehaviorandexcessiverisk-taking,”accordingtoeconomistJoseph
Stiglitz.Thatincluded“preyingonthepoorestAmericans.”Hesummedupthe
problem:“Ifyougivepeoplebadincentives,theybehavebadly,andthey
behavedjustasonewouldhaveexpected.”
14
Largedot-comsdangledfreeservicesinretail,search,andsocialmediain
exchangeforuserdata.AccordingtoanErnst&Youngsurvey,nearlytwothirds
ofmanagerspolledsaidtheycollectedconsumerdatatodrivebusiness,and
nearly80percentclaimedtohaveincreasedrevenuesfromthisdatamining.But
whenthesefirmsgethacked,it’stheconsumerswhohavetocleanupthemess
ofstolencreditcardandbankaccountinformation.It’snotsurprisingthat,inthe
samesurvey,nearlyhalfofconsumerssaidthey’dbecuttingoffaccesstotheir
datainthenextfiveyears,andoverhalfsaidtheywerealreadyprovidingless
data,includingcensoringthemselvesonsocialmedia,thaninthepreviousfive
years.
15
Breakthrough:Satoshiexpectedparticipantstoactintheirownself-
interests.Heunderstoodgametheory.Heknewthatnetworkswithout
gatekeepershavebeenvulnerabletoSybilattacks,wherenodesforgemultiple
identities,diluterights,anddepreciatethevalueofreputation.
16
Theintegrityof
thepeer-to-peernetworkandthereputationofitspeersbothdiminishifyou
don’tknowwhetheryou’redealingwiththreepartiesoronepartyusingthree
identities.SoSatoshiprogrammedthesourcecodesothat,nomatterhow
selfishlypeopleacted,theiractionswouldbenefitthesystemoverallandaccrue
totheirreputations,howevertheychosetoidentifythemselves.Theresource
requirementsoftheconsensusmechanism,combinedwithbitcoinsasreward,
couldcompelparticipantstodotherightthing,makingthemtrustworthyinthe
sensethattheywerepredictable.Sybilattackswouldbeeconomicallyunviable.
Satoshiwrote,“Byconvention,thefirsttransactioninablockisaspecial
transactionthatstartsanewcoinownedbythecreatoroftheblock.Thisaddsan
incentivefornodestosupportthenetwork.”
17
Bitcoinisanincentiveforminers
toparticipateincreatingablockandlinkingittothepreviousblock.Thosewho
completeablockfirstgetaquantityofbitcoinsfortheirefforts.Satoshi’s
protocolrewardedearlyadoptershandsomelywithbitcoin:forthefirstfour
years,minersreceived50bitcoins(BTC)foreachblock.Everyfouryears,the
rewardperblockwouldhalve:25BTC,12.5BTC,andsoon.Becausetheynow
ownbitcoin,theyhaveanincentivetoensuretheplatform’slong-termsuccess,
buyingthebestequipmenttorunminingoperations,spendingenergyas
efficientlyaspossible,andmaintainingtheledger.Bitcoinisalsoaclaimonthe
blockchain,notjustasanincentivetoparticipateinminingandtransactingwith
othersbutthroughownershipintheplatformitself.Distributeduseraccountsare
themostbasicelementofthecryptographicnetworkinfrastructure.Byowning
andusingbitcoin,oneisfinancingtheblockchain’sdevelopment.
Satoshichoseastheeconomicsettheownersofcomputingpower.This
requirestheseminerstoconsumearesourceexternaltothenetwork,namely
electricity,iftheywanttoparticipateintherewardsystem.Everysooften,
differentminersfindtwoequallyvalidblocksofequalheight,andtherestofthe
minersmustchoosewhichblocktobuildonnext.Theygenerallypick
whichevertheythinkwillwinratherthanbuildingonboth,becausethey’d
otherwisehavetosplittheirprocessingpowerbetweentheforks,andthat’sa
strategyforlosingvalue.Thelongestchainrepresentsthegreatestamountof
workandthereforeparticipantschooseitasthecanonicalstateofthe
blockchain.Incontrast,Ethereumchoseownersofcoinasitseconomicset.
RippleandStellarchosethesocialnetwork.
Theparadoxoftheseconsensusschemesisthatbyactinginone’sself-
interest,oneisservingthepeer-to-peer(P2P)network,andthatinturnaffects
one’sreputationasamemberoftheeconomicset.Beforeblockchain
technologies,peoplecouldn’teasilyleveragethevalueoftheirreputationonline.
Itwasn’tonlybecauseofSybilattacks,whereacomputercouldinhabitmultiple
roles.Identityismultifaceted,nuanced,andtransient.Fewpeopleseeallsides,
letalonethesubtletiesandthearcofouridentity.Fordifferentcontexts,wehave
toproducesomedocumentorothertoattesttosomedetailofouridentity.
People“withoutpapers”areconfinedtocollaboratingwiththeirsocialcircle.On
blockchainslikeStellar,that’sanexcellentstart,ameansofcreatingapersistent
digitalpresenceandestablishingreputationthatisportablewellbeyondone’s
geographiccommunity.
Anotherbreakthroughtopreservevalueisthemonetarypolicyprogrammed
intothesoftware.“Allmoneymankindhaseverusedhasbeeninsecureinone
wayoranother,”saidNickSzabo.“Thisinsecurityhasbeenmanifestedina
widevarietyofways,fromcounterfeitingtotheft,butthemostperniciousof
whichhasprobablybeeninflation.”
18
Satoshicappedthesupplyofbitcoinsat21
milliontobeissuedovertimetopreventarbitraryinflation.Giventhehalving
everyfouryearsofbitcoinsminedinablockandthecurrentrateofmining—six
blocksperhour—those21millionBTCshouldbeincirculationaroundtheyear
2140.Nohyperinflationorcurrencydevaluationcausedbyincompetentor
corruptbureaucracies.
Currenciesarenottheonlyassetsthatwecantradeontheblockchain.
“We’veonlybeguntoscratchthesurfaceonwhat’spossible,”saidHillof
Blockstream.“We’restillatthat1994pointintermsofapplicationsand
protocolsthatreallytakeadvantageofthenetworkandshowtheworld,‘Here’s
whatyoucandothatistotallygroundbreaking.’”
19
Hillexpectstoseedifferent
financialinstruments,fromproof-of-assetauthenticitytoproof-of-property
ownership.HealsoexpectstoseebitcoinapplicationsintheMetaverse(avirtual
world)whereyoucanconvertbitcoinintoKongbucksandhireHiroProtagonist
tohackyousomedata.
20
OrjackyourselfintotheOASIS(aworldofmultiple
virtualutopias)whereyouactuallydodiscovertheEasteregg,winHalliday’s
estate,licenseOASIS’svirtualpositioningrightstoGoogle,andbuyaself-
drivingcartonavigateToronto.
21
And,ofcourse,there’stheInternetofThings,whereweregisterourdevices,
assignthemanidentity(Intelisalreadydoingthis),andcoordinatepayment
amongthemusingbitcoinratherthanmultiplefiatcurrencies.“Youcandefine
allthesenewbusinesscasesthatyouwanttodo,andhaveitinteroperatewithin
thenetwork,andusethenetworkinfrastructurewithouthavingtobootstrapa
newblockchain,justforyourself,”saidHill.
22
Unlikefiatcurrency,eachbitcoinisdivisibletoeightdecimalplaces.It
enablesuserstocombineandsplitvalueovertimeinasingletransaction,
meaningthataninputcanhavemultipleoutputsovermultipleperiodsoftime,
whichisfarmoreefficientthanaseriesoftransactions.Userscansetupsmart
contractstometerusageofaserviceandmaketinyfractionsofpaymentsat
regularintervals.
ImplicationsfortheBlockchainEconomy:ThefirsteraoftheInternet
missedallthis.Nowwehaveaplatformwherepeopleandeventhingshave
properfinancialincentivestocollaborateeffectivelyandcreatejustabout
anything.Imagineonlinediscussiongroupswhereparticipantshavereputations
worthenhancing,inpartbecausebadbehaviorwillcostthemfinancially.Trolls
neednotapply.Imagineapeer-to-peernetworkofsolarpanelswherehome
ownersreceivereal-timecompensationontheblockchainforgenerating
sustainableenergy.Imagineanopensourcesoftwareprojectwhereacommunity
ofdeveloperscompensatessupercontributorsforacceptablecode.Imagine
there’snocountries.Itisn’thardtodo.
23
4.Security
Principle:Safetymeasuresareembeddedinthenetworkwithnosinglepointof
failure,andtheyprovidenotonlyconfidentiality,butalsoauthenticityand
nonrepudiationtoallactivity.Anyonewhowantstoparticipatemustuse
cryptography—optingoutisnotanoption—andtheconsequencesofreckless
behaviorareisolatedtothepersonwhobehavedrecklessly.
ProblemtoBeSolved:Hacking,identitytheft,fraud,cyberbullying,
phishing,spam,malware,ransomware—alloftheseunderminethesecurityof
theindividualinsociety.ThefirsteraoftheInternet,ratherthanbringing
transparencyandimpairingviolations,seemstohavedonelittletoincrease
securityofpersons,institutions,andeconomicactivity.TheaverageInternetuser
oftenhastorelyonflimsypasswordstoprotecte-mailandonlineaccounts
becauseserviceprovidersoremployersinsistonnothingstronger.Considerthe
typicalfinancialintermediary:itdoesn’tspecializeindevelopingsecure
technology;itspecializesinfinancialinnovation.IntheyearthatSatoshi
publishedhiswhitepaper,databreachesatsuchfinancialfirmsasBNYMellon,
Countrywide,andGEMoneyaccountedforover50percentofallidentitythefts
reportedthatyear,accordingtotheIdentityTheftResourceCenter.
24
By2014,
thatfigurehadfallento5.5percentforthefinancialsector,butbreachesin
medicalandhealthcarejumpedto42percentoftheyearstotal.IBMreported
thattheaveragecostofadatabreachis$3.8million,whichmeansthatdata
breacheshavecostatleast$1.5billionoverthelasttwoyears.
25
Theaverage
costtoanindividualofmedicalidentityfraudiscloseto$13,500,andoffenses
areontherise.Consumersdon’tknowwhichaspectoftheirlifewillbehacked
next.
26
Ifthenextstageofthedigitalrevolutioninvolvescommunicatingmoney
directlybetweenparties,thencommunicationneedstobehackproof.
Breakthrough:Satoshirequiredparticipantstousepublickeyinfrastructure
(PKI)forestablishingasecureplatform.PKIisanadvancedformof
“asymmetric”cryptography,whereusersgettwokeysthatdon’tperformthe
samefunction:oneisforencryptionandonefordecryption.Hence,theyare
asymmetric.Thebitcoinblockchainisnowthelargestciviliandeploymentof
PKIintheworld,andsecondoveralltotheU.S.DepartmentofDefense
commonaccesssystem.
27
Pioneeredinthe1970s,
28
asymmetriccryptographygainedsometractionin
the1990sintheformofe-mailencryptionfreewaresuchasPrettyGoodPrivacy.
PGPisprettysecure,andprettymuchahassletousebecauseeveryoneinyour
networkneedstobeusingit,andyouhavetokeeptrackofyourtwokeysand
everyone’spublickeys.There’snopassword-resetfunction.Ifyouforgetyours,
youhavetostartallover.AccordingtotheVirtruCorporation,“theuseofemail
encryptionisontherise.Still,only50percentofemailsareencryptedintransit,
andend-to-endemailencryptionisrarerstill.”
29
Somepeopleusedigital
certificates,piecesofcodethatprotectmessageswithouttheencrypt-decrypt
operations,butusersmustapply(andpayanannualfee)fortheirindividual
certificates,andthemostcommone-mailservices—Google,Outlook,and
Yahoo!—don’tsupportthem.
“Pastschemesfailedbecausetheylackedincentive,andpeoplenever
appreciatedprivacyasincentiveenoughtosecurethosesystems,”
30
Andreas
Antonopoulossaid.Thebitcoinblockchainsolvesnearlyalltheseproblemsby
providingtheincentiveforwideadoptionofPKIforalltransactionsofvalue,
notonlythroughtheuseofbitcoinbutalsointhesharedbitcoinprotocols.We
needn’tworryaboutweakfirewalls,thievingemployees,orinsurancehackers.If
we’rebothusingbitcoin,ifwecanstoreandexchangebitcoinsecurely,thenwe
canstoreandexchangehighlyconfidentialinformationanddigitalassets
securelyontheblockchain.
Here’showitworks.Digitalcurrencyisn’tstoredinafileperse.It’s
representedbytransactionsindicatedbyacryptographichash.Usersholdthe
cryptokeystotheirownmoneyandtransactdirectlywithoneanother.Withthis
securitycomestheresponsibilityofkeepingone’sprivatekeysprivate.
Securitystandardsmatter.Thebitcoinblockchainrunsontheverywell-
knownandestablishedSHA-256publishedbytheU.S.NationalInstituteof
StandardsandTechnologyandacceptedasaU.S.FederalInformation
ProcessingStandard.Thedifficultyofthemanyrepetitionsofthismathematical
calculationrequiredtofindablocksolutionforcesthecomputationaldeviceto
consumesubstantialelectricityinordertosolveapuzzleandearnnewbitcoin.
Otheralgorithmssuchasproofofstakeburnmuchlessenergy.
RememberwhatAustinHillsaidatthestartofthischapteraboutnever
usingthenewestandgreatestinalgorithms.Hill,whoworkswithcryptographer
AdamBackatBlockstream,expressedconcernovercryptocurrenciesthatdon’t
useproofofwork.“Idon’tthinkproofofstakeultimatelyworks.Tome,it’sa
systemwheretherichgetricher,wherepeoplewhohavetokensgettodecide
whattheconsensusis,whereasproofofworkultimatelyisasystemrootedin
physics.Ireallylikethatbecauseit’sverysimilartothesystemforgold.”
31
Finally,thelongestchainisgenerallythesafestchain.Thesecurityof
Satoshi’sblockchainbenefitsgreatlyfromitsrelativematurityandits
establishedbaseofbitcoinusersandminers.Hackingitwouldrequiremore
computingpowerthanattackingshortchains.Hillsaid,“Wheneveroneofthese
newnetworksstartupwithanallnewchain,there’sabunchofpeoplewho
directtheirlatentcomputerpower,allthecomputersandCPUsthattheytook
offlinefromminingbitcoin,theypointatthesenewnetworkstomanipulate
themandtoessentiallyattackthenetworks.”
32
ImplicationsfortheBlockchainEconomy:Inthedigitalage,
technologicalsecurityisobviouslythepreconditiontosecurityofapersonin
society.Todaybitscanpassthroughourfirewallsandwallets.Thievescanpick
ourpocketsorhijackourcarsfromtheothersideoftheworld.Aseachofus
reliesmoreondigitaltoolsandplatforms,suchthreatshavemultipliedinways
thatmostofusdonotunderstand.Withthebitcoinblockchain,withitsmore
securedesignanditstransparency,wecanmaketransactionsofvalueand
protectwhathappenstoourdata.
5.Privacy
Principle:Peopleshouldcontroltheirowndata.Period.Peopleoughttohave
therighttodecidewhat,when,how,andhowmuchabouttheiridentitiestoshare
withanybodyelse.Respectingone’srighttoprivacyisnotthesameasactually
respectingone’sprivacy.Weneedtodoboth.Byeliminatingtheneedtotrust
others,Satoshieliminatedtheneedtoknowthetrueidentitiesofthoseothersin
ordertointeractwiththem.“I’vespokentomanyengineersandcomputer
scientists,andtheyalltellme—everysingleone—‘Ofcourse,wecanembed
privacyintodataarchitecture,intothedesignoftheprograms.Ofcoursewe
can,’”
33
saidAnnCavoukian.
ProblemtoBeSolved:Privacyisabasichumanrightandthefoundationof
freesocieties.InthelasttwentyyearsoftheInternet,centraldatabasesinboth
publicandprivatesectorshaveaccumulatedallsortsofconfidentialinformation
aboutindividualsandinstitutions,sometimeswithouttheirknowledge.
Everywherepeopleworrythatcorporationsarecreatingwhatwecouldcall
cyberclonesofthembyfrackingthedigitalworldfortheirdata.Evendemocratic
governmentsarecreatingsurveillancenations,evidencedbytherecentU.S.
NationalSecurityAgency’soverextendingitssurveillancerightsbyconducting
warrantlessspyingovertheInternet.Thesearedoubleprivacyoffenses,first
collectingandusingourdatawithoutourunderstandingorourpermission,then
notprotectingthehoneypotfromhackers.“It’sallaboutabandoningzero-sum
pursuits,either-orpropositions,win-lose,youcanhaveoneinterestortheother.
That,tome,issodated,soyesterday,andsocounterproductive,”said
Cavoukian.“Wesubstituteapositive-summodelwhichis,essentially,youcan
haveprivacyand—fillintheblank.”
34
Breakthrough:Satoshiinstallednoidentityrequirementforthenetwork
layeritself,meaningthatnoonehadtoprovideaname,e-mailaddress,orany
otherpersonaldatainordertodownloadandusethebitcoinsoftware.The
blockchaindoesn’tneedtoknowwhoanybodyis.(AndSatoshididn’tneedto
captureanybody’sdatatomarketotherproducts.Hisopensourcesoftwarewas
theultimateinthoughtleadershipmarketing.)That’showtheSocietyfor
WorldwideInterbankFinancialTelecommunicationworks—ifyoupayincash,
thenSWIFTdoesn’tgenerallyaskforidentification—butwe’reguessingthat
manySWIFTofficeshavecameras,andfinancialinstitutionsmustcomplywith
anti–moneylaundering/knowyourcustomer(AML/KYC)requirementstojoin
anduseSWIFT.
Additionally,theidentificationandverificationlayersareseparatefromthe
transactionlayer,meaningthatPartyAbroadcaststhetransferofbitcoinsfrom
PartyAsaddresstoPartyB’saddress.There’snoreferencetoanyone’sidentity
inthattransaction.ThenthenetworkconfirmsthatPartyAnotonlycontrolled
theamountofbitcoinspecifiedbutalsoauthorizedthetransactionbefore
recognizingPartyAsmessageas“unspenttransactionoutput”associatedwith
PartyB’saddress.OnlywhenPartyBgoestospendthatamountdoesthe
networkverifythatPartyBnowcontrolsthatbitcoin.
Comparethatwithusingcreditcards,averyidentity-centricmodel.Thats
whymillionsofpeople’saddressesandphonenumbersarestoleneverytimea
databasegetsbreached.Considerthenumberofrecordsattachedtoafewofthe
morerecentdatabreaches:T-Mobile,15millionrecords;JPMorganChase,76
million;AnthemBlueCrossBlueShield,80million;eBay,145million;Office
ofPersonnelManagement,37million;HomeDepot,56million;Target,70
million;andSony,77million;andthereweresmallerbreachesofairlines,
universities,gasandelectricutilities,andhospitalfacilities,someofourmost
preciousinfrastructureassets.
35
Ontheblockchain,participantscanchoosetomaintainadegreeofpersonal
anonymityinthesensethattheyneedn’tattachanyotherdetailstotheiridentity
orstorethosedetailsinacentraldatabase.Wecan’tunderscorehowhugethisis.
Therearenohoneypotsofpersonaldataontheblockchain.Theblockchain
protocolsallowustochoosethelevelofprivacywe’recomfortablewithinany
giventransactionorenvironment.Ithelpsustobettermanageouridentitiesand
ourinteractionwiththeworld.
Astart-upcalledPersonalBlackBoxCompany,LLC,isaimingtohelplarge
corporationstransformtheirrelationshiptoconsumerdata.PBB’schief
marketingofficer,HalukKulin,toldus,“CompaniessuchasUnileveror
Prudentialarecomingtousandsaying,‘We’reveryinterestedinbuildingbetter
datarelationships.Canweleverageyourplatform?We’reveryinterestedin
reducingourdataliability.’They’reseeingthatdataisincreasinglyatoxicasset
insideofcorporations.”
36
Itsplatformgivesclientsaccesstoanonymousdata—
muchlikeaclinicaltrial,wherepharmaceuticalsknowonlytherelevantaspects
ofpatients’health—withouttakingonanydatasecurityrisk.Someconsumers
maygiveawaymoreinformationinexchangeforbitcoinsorothercorporate
benefits.Onthebackend,PBB’splatformdeploysPKIsothatonlyconsumers
haveaccesstotheirdatathroughtheirprivatekeys.NotevenPBBhasaccessto
consumerdata.
Theblockchainoffersaplatformfordoingsomeveryflexibleformsof
selectiveandanonymousattestation.AustinHilllikenedittotheInternet.“A
TCP/IPaddressisnotidentifiedtoapublicID.Thenetworklayeritselfdoesn’t
know.AnyonecanjointheInternet,getanIPaddress,andstartsendingand
receivingpacketsfreelyaroundtheworld.Asasociety,we’veseenanincredible
benefitallowingthatlevelofpseudonymity....Bitcoinoperatesalmostexactly
likethis.Thenetworkitselfdoesnotenforceidentity.That’sagoodthingfor
societyandforpropernetworkdesign.”
37
Sowhiletheblockchainispublic—anyonecanviewitatanytimebecauseit
residesonthenetwork,notwithinacentralizedinstitutionchargedwithauditing
transactionsandkeepingrecords—users’identitiesarepseudonymous.This
meansthatyouhavetodoaconsiderableamountoftriangulatingofdatato
figureoutwhoorwhatownsaparticularpublickey.Thesendercanprovide
onlythemetadatathattherecipientneedstoknow.Moreover,anyonecanown
multiplepublic/privatekeysets,justasanyonecanhavemultipledevicesor
accesspointstotheInternetandmultiplee-mailaddressesundervarious
pseudonyms.
Thatsaid,InternetserviceproviderslikeTimeWarnerthatassignIP
addressesdokeeprecordslinkingidentitiestoaccounts.Likewise,ifyougeta
bitcoinwalletfromalicensedonlineexchangesuchasCoinbase,thatexchange
isrequiredtodoitsduediligenceunderAML/KYCrequirements.Forexample,
hereisCoinbase’sprivacypolicy:“Wecollectinformationsenttousthrough
yourcomputer,mobilephone,orotheraccessdevice.Thisinformationmay
includeyourIPaddress,deviceinformationincluding,butnotlimitedto,
identifier,devicenameandtype,operatingsystem,location,mobilenetwork
informationandstandardwebloginformation,suchasyourbrowsertype,traffic
toandfromoursiteandthepagesyouaccessedonourwebsite.”
38
So
governmentscansubpoenaISPsandexchangesforthistypeofuserdata.But
theycan’tsubpoenatheblockchain.
It’salsoimportanttoknowthatwecandesignhigherlevelsoftransparency
intoanysetoftransactions,application,orbusinessmodel,shouldallthe
stakeholdersagreetodoso.Invaryingsituationswewillseenewcapabilities
whereradicaltransparencymakesalotofsense.Whencompaniestellthetruth
tocustomers,shareholders,orbusinesspartners,theybuildtrust.
39
Thatis,
privacyforindividuals,transparencyfororganizations,institutions,andpublic
officials.
ImplicationsfortheBlockchainEconomy:Tobesure,theblockchain
providesopportunitiestostopthestampedetoasurveillancesociety.Nowthink
abouttheproblemofcorporatebigdataforeachofus.Whatdoesitmeanfora
corporationtohaveperfectinformationaboutyou?Wearesometwentyyears
intotheglobalInternetera,andonlyatthebeginningofcorporateaccesstothe
mostintimatedetailsofourpersonallives.Comingupfastarepersonalhealth
andfitnessdata,ourdailycomingsandgoings,theinnerlivesofourhomes,and,
well,younameit.Manypeoplearesimplyunawareofthemanymicro-Faustian
dealstheymakeonlineeveryday.BysimplyusingWebsites,consumers
authorizetheirownerstoconverttrailsofdigitalcrumbsintodetailedroadmaps
forprivatecommercialbenefit.
Unlessweshifttothenewparadigm,it’snotsciencefictiontoforesee
hundredsofmillionsofavatarshummingawayintomorrow’sdatacenters.With
blockchaintechnology,youcouldownyourpersonalavatarsasyoudointhe
SecondLifevirtualworld,butwithreal-worldimplications.TheVirtualYou
couldprotectyourpersonalinformation,givingawayonlytheinformation
requiredinanysocialoreconomicexchangeworkunderyourcommandand
makesureyoureceivecompensationforanyofyourdatathathasvalueto
anotherparty.It’sashiftfrombigdatatoprivatedata.Callit“littledata.”
6.RightsPreserved
Principle:Ownershiprightsaretransparentandenforceable.Individual
freedomsarerecognizedandrespected.Weholdthistruthtobeself-evident—
thatallofusarebornwithcertaininalienablerightsthatshouldandcanbe
protected.
ProblemtoBeSolved:Thefirsteraofthedigitaleconomywasabout
findingwaystoexercisetheserightsmoreefficiently.TheInternetbecamea
mediumfornewformsofart,news,andentertainment,forestablishing
copyrightofpoems,songs,stories,photographs,andaudioandvideorecordings.
WecouldapplytheUniformCommercialCodefurthertodoonlinewhatthe
codehadalreadyexpeditedinphysicalspace,whichwastoeliminatetheneedto
negotiateandcreatecontractsforeverysingleitem,likeatubeoftoothpaste,no
matterhowsmallitsprice.Evenso,wehadtotrustmiddlementomanage
transactions,andtheyhadthepowertodenythetransaction,delayit,andhold
themoneyintheirownaccount(bankerscallthis“float”),orclearitonlyto
reverseitlater.Theyexpectedapercentageofpeopletocheatandaccepteda
certainleveloffraudasunavoidable.
Inthisgreatburstofefficiency,legitimaterightsgottrampled,therightsnot
onlytoprivacyandsecuritybutalsofreespeech,reputation,andequal
participation.Peoplecouldanonymouslycensorus,defameus,andblockusat
littlecostorrisktothemselves.Filmmakerswhodependedonrevenuesfrom
syndication,videoondemand,enhancedDVDsales,andcablerightstofilms
releaseddecadesearlierfoundtheirrevenuestreamdryinguptoatrickleastheir
fansuploadeddigitalfilesforotherstodownloadforfree.
Breakthrough:Theproofofworkrequiredtomintcoinsalsotime-stamps
transactions,sothatonlythefirstspendofacoinwouldclearandsettle.
CombinedwithPKI,theblockchainnotonlypreventsadoublespendbutalso
confirmsownershipofeverycoinincirculation,andeachtransactionis
immutableandirrevocable.Inotherwords,wecan’ttradewhatisn’toursonthe
blockchain,whetherit’srealproperty,intellectualproperty,orrightsof
personhood.Norcanwetradewhatwearen’tauthorizedtotradeonsomebody
else’sbehalfinanagencyrole,perhapsasalawyeroracompanymanager.And
wecan’tstiflepeople’sfreedomofexpression,assembly,andreligion.
HalukKulinofPersonalBlackBoxsaiditbest:“Inthethousandsofyearsof
humansocialinteraction,everytimewe’vetakentherightofparticipationfrom
thepeople,theyhavecomebackandbrokenthesystem.We’rediscoveringthat,
evenindigital,stealingtheirconsentisnotsustainable.”
40
AstheLedgerof
Everything,theblockchaincanserveasapublicregistrythroughsuchtoolsas
ProofofExistence(PoE),asitethatcreatesandregisterscryptographicdigests
ofdeeds,titles,receipts,orlicensesontheblockchain.ProofofExistence
doesn’tmaintainacopyofanyoriginaldocument;thehashofthedocumentis
calculatedontheusersmachine,notonthePoEsite,thusensuring
confidentialityofcontent.EvenifacentralauthorityshutsdownProofof
Existence,theproofremainsontheblockchain.
41
Sotheblockchainprovides
meansofprovingownershipandpreservingrecordswithoutcensorship.
OntheInternet,wecouldn’tnecessarilyenforcecontractualrightsoroversee
implementation.Andso,formorecomplextransactionsinvolvingbundlesof
rightsandmultipleparties,wenowhavethesmartcontract,apieceofspecial
purposecodethatexecutesacomplexsetofinstructionsontheblockchain.
“Thatintersectionoflegaldescriptionsandsoftwareisfundamental,andthe
smartcontractsarethefirststepinthatdirection,”saidSteveOmohundro,
presidentofthinktankSelf-AwareSystems.“Oncetheprinciplesofhowyou
codifylawdigitallybecomemoreunderstood,thenIthinkeverycountrywill
startdoingit....Eachjurisdictionwouldencodeitslaws,preciselyand
digitally,andtherewouldbetranslationprogramsbetweenthem....Gettingrid
ofthefrictionofalllegalstuffisgoingtobeahugeeconomicgain.”
42
Asmartcontractprovidesameansforassigningusagerightstoanother
party,asacomposermightassignacompletedsongtoamusicpublisher.The
codeofthecontractcouldincludethetermordurationoftheassignment,the
magnitudeofroyaltiesthatwouldflowfromthepublisherstothecomposers
bitcoinaccountduringtheterm,andsometriggersforterminatingthecontract.
Forexample,ifthecomposersaccountreceivedlessthanaquarterofabitcoin
inaconsecutivethirty-dayperiod,thenallrightswouldautomaticallyrevertto
thecomposer,andthepublisherwouldnolongerhaveaccesstothecomposers
workregisteredontheblockchain.Tosetthissmartcontractinmotion,boththe
composerandthepublisher—andperhapsrepresentativesofthepublishers
financeandlegalteams—wouldsignusingtheirprivatekeys.
Asmartcontractalsoprovidesameansforownersofassetstopooltheir
resourcesandcreateacorporationontheblockchain,wherethearticlesof
incorporationarecodedintothecontract,clearlyspellingoutandenforcingthe
rightsofthoseowners.Associatedagency-employmentcontractscoulddefine
thedecisionrightsofmanagersbycodingwhattheycouldandcouldn’tdowith
corporateresourceswithoutownershippermission.
Smartcontractsareunprecedentedmethodsofensuringcontractual
compliance,includingsocialcontracts.“Ifyouhaveabigtransactionwitha
specificcontrolstructure,youcanpredicttheoutcomeatanyperiodintime,”
saidAntonopoulos.“IfIhaveafullyverifiedsignedtransactionwithanumber
ofsignaturesinamultisignatureaccount,Icanpredictwhetherthattransaction
willbeverifiablebythenetwork.Andifitisverifiablebythenetwork,thenthat
transactioncanberedeemedandirrevocablyso.Nocentralauthorityorthird
partycanrevokeit,noonecanoverridetheconsensusofthenetwork.That’sa
newconceptinbothlawandfinance.Thebitcoinsystemprovidesaveryhigh
degreeofcertaintyastotheoutcomeofacontract.”
43
Thecontractcouldn’tbeseized,stopped,orredirectedtoadifferentbitcoin
address.Youneedonlytotransmitthesignedtransactiontoanyofthebitcoin
networknodesfromanywhereusinganymedium.SaidAntonopoulos,“People
couldshutdowntheInternet,andIcouldstilltransmitthattransactionover
shortwaveradiowithMorsecode.Agovernmentagencycouldtrytocensormy
communication,andIcouldstilltransmitthattransactionasaseriesofsmiley
emoticonsoverSkype.Aslongassomeoneontheotherendcoulddecodethe
transactionandrecorditintheblockchain,Icouldeffectthe[smartcontract].So
we’veconvertedsomethingthat,inlaw,isalmostimpossibletoguaranteeinto
somethingthathasverifiablemathematicalcertainty.”
44
Considerpropertyrights,bothrealandintellectual:“Ownershipisjusta
recognitionbyagovernmentoranagencythatyouownsomethingandtheywill
defendyourclaimsonthatownership,”saidStephenPair,CEOofBitPay.
“That’sjustacontractthatcanbesignedbywhateverauthoritythatwilldefend
yourrightsforyouandtheysignitovertoyouridentity,andthenonceyouhave
that,andthatownershipisrecorded,youthencantransferittootherpeople.
That’sverystraightforward.”
45
Communitieswithsharedresourcescould
consideraspectrumofrights,borrowingfromNobelPrize–winningeconomist
ElinorOstrom’spyramidofrights,apeckingorderofsorts.Atthelowestlevel,
thereareauthorizeduserswhomayonlyaccessandwithdrawresources;
claimantswhohavethoserightsbutcanalsoexcludeothersfromaccess;
proprietorswhoholdmanagementrightsbeyondaccessandexclusion;and
ownerswhocanaccess,use,excludeothers,manage,andselltheresource(i.e.,
rightofalienation).
46
Nowconsidertherightstoprivacyandpublicity:“Ourmodelisreallyrights
appliedtothemarket,”saidKulinofPersonalBlackBox.Hiscompanyuses
blockchaintechnologytorepresentandenforcetherightsofindividualsto
extractvaluefromtheirpersonaldata.“Theblockchainprovidesusawhole
groupofpeoplewhoarebothmission-alignedandtechnology-alignedtocreate
differentwaysthatenterprisescanleveragetheseuniquedatasetsratherthan
protecttheirdatasilos.”
47
Simplyput,peoplecreatebetterdatathanwhata
companycanfrackfromthem,andconsumersaremuchbetteratemotionally
aligningwithbrandsandinfluencingtheirpeersthancompaniesare.
ImplicationsfortheBlockchainEconomy:Asaneconomicdesign
principle,enforcingrightsmuststartwithclarifyingrights.Inthefieldof
managementscience,theholacracymovementisaninteresting,ifnot
controversial,exampleofhowmembersoforganizationsaredefiningthework
thatneedstobedoneandthenassigningrightsandtheresponsibilitytodothis
workaspartofawhole.
48
Whodidweagreeshouldhavethissetofdecisions
andactivitiesatourcompany?Theanswertothatquestioncanbecodifiedina
smartcontractandplacedontheblockchainsothatthedecisions,progress
towardthegoal,andincentivesarealltransparentandreachedbyconsensus.
Tobesure,thisisnotsimplyabouttechnology.It’smuchbiggerthan
physicalassets,intellectualproperty,orPersonalBlackBox’sprivacytoolwitha
publicityrightsmodulefortheKardashians.Weneedgreatereducationabout
rightsandthedevelopmentofnewunderstandingsaboutrightsmanagement
systems.We’llhavevotingrightsmanagementsystemsandpropertyrights
managementsystems.Somestart-upwillcreatearightsdashboardthatwill
indicateaperson’slevelofcivicengagement,wherevotingisbutoneofseveral
measures,likedonatingskills,reputation,time,andbitcoinorprovidingfree
accesstoone’sphysicalorintellectualproperty.Buckleup.
7.Inclusion
Principle:Theeconomyworksbestwhenitworksforeveryone.Thatmeans
loweringthebarrierstoparticipation.Itmeanscreatingplatformsfordistributed
capitalism,notjustaredistributedcapitalism.
ProblemtoBeSolved:ThefirsteraoftheInternetcreatedmanywonders
formanypeople.Butaswehavepointedout,amajorityoftheworld’s
populationisstillexcluded—notjustfromaccesstotechnologybutalsofrom
accesstothefinancialsystemandeconomicopportunity.Moreover,thepromise
thatthisnewcommunicationsmediumwouldbringprosperitytoallhasrung
hollow.Yes,ithelpedcompaniesinthedevelopedworldprovidejobsfor
millionsintheemergingeconomies.Itloweredthebarrierstoentryfor
entrepreneursandgavethedisadvantagedaccesstoopportunitiesandbasic
information.
That’snotenough.Therearestilltwobillion
49
peoplewithoutabank
account,andinthedevelopedworld,prosperityisactuallydecliningassocial
inequalitycontinuestogrow.Indevelopingeconomies,mobileisoftentheonly
affordablemeansofconnecting.Mostfinancialinstitutionshavemobilepayment
appsthatcombinecamerasandQRcodes.However,thefeesneededtosupport
theseintermediariesmakemicropaymentsimpractical.Consumersatthebottom
ofthepyramidstillcan’taffordtheminimumaccountbalances,minimum
paymentamounts,ortransactionfeestousethesystem.Itsinfrastructurecosts
makemicropaymentsandmicroaccountsunfeasible.
Breakthrough:SatoshidesignedthesystemtoworkontopoftheInternet
stack(TCP/IP),butitcouldrunwithouttheInternetifnecessary.Satoshi
imaginedthatthetypicalpersonwouldbeinteractingwiththeblockchain
throughwhathecalled“simplifiedpaymentverification”(SPV)modethatcan
workoncellphonestomobilizetheblockchain.Nowanyonewithaflipphone
canparticipateintheeconomy,orinamarket,asaproducerorconsumer.No
bankaccountrequired,noproofofcitizenshiprequired,nobirthcertificate
required,nohomeaddressrequired,nostablelocalcurrencyrequiredtousethe
blockchaintechnologies.Theblockchaindrasticallylowersthecostof
transmittingsuchfundsasremittances.Itsignificantlylowersthebarrierto
havingabankaccount,obtainingcredit,andinvesting.Anditsupports
entrepreneurshipandparticipationinglobaltrade.
ThatwaspartofSatoshi’svision.Heunderstoodthat,forpeoplein
developingeconomies,thesituationwasworse.Whencorruptorincompetent
bureaucratsinfailedstatesneedfundingtorunthegovernment,theircentral
banksandtreasuriessimplyprintmorecurrencyandthenprofitfromthe
differencebetweenthecostofmanufacturingandthefacevalueofthecurrency.
That’sseigniorage.Theincreaseinthemoneysupplydebasesthecurrency.Ifthe
localeconomyreallytanked—asitdidinArgentinaandUruguay,andmore
recentlyinCyprusandGreece—thesecentralbodiescouldfreezethebankassets
ofwhoevercouldn’taffordabribe.Givensuchapossibility,thewealthycould
storetheirassetsinmoretrustworthyjurisdictionsandmorestablecurrencies.
Butnotthepoor.Whatevermoneytheyhavebecomesworthless.Officials
couldsiphonoffinflowsofforeignaidandribbontheirborderswithredtape,
addingfrictiontoeveryattemptathelpingtheirpeople,frommothersand
childrenneedingfoodandmedicinetovictimsofwar,prolongeddrought,and
othernaturaldisasters.
TheAustraliamicropaymentservicemHITs(shortforMobileHandset
InitiatedTransactions)haslaunchedanewservice,BitMoby,thatenables
consumersinmorethanonehundredcountriestotopuptheirmobilephone
creditbytextingmHITsanamountofbitcoin.
50
Accordingtobitcoincore
developerGavinAndresen,“Youdon’tseeeverytransaction;youseeonlythe
transactionsyoucareabout.You’renottrustingpeerswithyourmoney,you’re
justtrustingthemtogiveyoutheinformationtouringacrossthenetwork.”
51
“Thepotentialofusingtheblockchainforpropertyrecordsintheemerging
world,wherethat’sahugeissuerelatedtopoverty,”issignificant,saidAustin
Hill.“Thereisn’tatrustedentitythathasgovernanceoverlandtitle,andso
allowingpeopletoactuallysay,‘Iownthisproperty,’andthenusethatfor
collateraltoimprovethemandtheirfamilysituationisafascinatingusecase.”
52
Onatechnicalnote,AndresencalledonNielsen’slawofInternetbandwidth,
wherehigh-enduserbandwidthincreasesby50percenteachyear,whereasthe
bandwidthofthemassestendstolagbytwoorthreeyears.Bandwidthlags
behindcomputerprocessingpower,whichincreasesbyabout60percent
annually(Moore’slaw).Sobandwidthisthegatingfactor,accordingtoJakob
Nielsen.
53
Mostdesigns—interfaces,Websites,digitalproducts,services,
organizations,andsoforth—willneedtoaccommodatethetechnologyofthe
massestoleveragenetworkeffects.Soinclusionmeansconsideringthefull
spectrumofusage—notjustthestateofthescienceofhigh-endusers,butthe
slowtechandsporadicpoweroutagesofusersinremoteregionsoftheworld’s
poorestcountries.
ImplicationsfortheBlockchainEconomy:Laterinthebook,wetackle
theissueoftheprosperityparadox—howthefirsteraoftheInternetbenefited
many,butoverallprosperityintheWesternworldformostpeopleisnolonger
improving.Thefoundationforprosperityisinclusion,andblockchainscanhelp.
Let’sbeclearthatinclusionhasmultipledimensions.Itmeansanendtosocial,
economic,andracialhegemony,anendtodiscriminationbasedonhealth,
gender,sexualidentification,orsexualpreference.Itmeansendingbarriersto
accessbecauseofwhereapersonlives,whetherapersonspentanightinjail,or
howapersonvoted,butalsoanendtoglassceilings,andgoodol’boys’clubsof
countlessvarieties.
DESIGNINGTHEFUTURE
OurconversationwithAnnCavoukianinspiredustofollowuponGermany’s
“Neveragain”promise.WecameacrossthewordsofGermanfederalpresident
JoachimGauckontheDayofRemembranceoftheVictimsofNational
Socialism,victimsofHitlersregime.“Ourmoralobligationscannotbefulfilled
solelyatthelevelofremembrance.Therealsoexistswithinusadeepand
abidingcertaintythatremembrancebestowsamissiononus.Thatmissiontells
ustoprotectandpreservehumanity.Ittellsustoprotectandpreservetherights
ofeveryhumanbeing.”
54
WashealludingtogenocideinSyria,Iraq,Darfur,
Srebrenica,Rwanda,andCambodia,aftertheGermanpeoplehadvowed,
“Neveragain”?
Webelievethatblockchaintechnologycouldbeanimportanttoolfor
protectingandpreservinghumanityandtherightsofeveryhumanbeing,a
meansofcommunicatingthetruth,distributingprosperity,and—asthenetwork
rejectsthefraudulenttransactions—ofrejectingthoseearlycancerouscellsfrom
asocietythatcangrowintotheunthinkable.
Admittedly,aboldstatement.Readonandjudgeforyourself.
Fromamoreparochialandpracticalperspective,thesesevenprinciplescan
serveasaguidetodesigningthenextgenerationofhigh-performanceand
innovativecompanies,organizations,andinstitutions.Ifwedesignforintegrity,
power,value,privacy,security,rights,andinclusion,thenwewillberedesigning
oureconomyandsocialinstitutionstobeworthyoftrust.Wenowturnour
attentiontohowthiscouldrolloutandwhatyoushouldconsiderdoing.
PARTII
TRANSFORMATIONS
T
CHAPTER3
REINVENTINGFINANCIALSERVICES
heglobalfinancialsystemmovestrillionsofdollarsdaily,servesbillionsof
people,andsupportsaglobaleconomyworthmorethan$100trillion.
1
It’s
theworld’smostpowerfulindustry,thefoundationofglobalcapitalism,andits
leadersareknownastheMastersoftheUniverse.Closerup,it’saRube
Goldbergcontraptionofunevendevelopmentsandbizarrecontradictions.First,
themachinehasn’thadanupgradeinawhile.Newtechnologyhasbeenwelded
ontoaginginfrastructurehelter-skelter.ConsiderthebankofferingInternet
bankingbutstillissuingpaperchecksandrunningmainframecomputersfrom
the1970s.Whenoneofitscustomerstapshercreditcardonastate-of-the-art
cardreadertobuyaStarbucksgrandelatte,hermoneypassesthroughnofewer
thanfivedifferentintermediariesbeforereachingStarbucks’sbankaccount.The
transactiontakessecondstoclearbutdaystosettle.
ThentherearethelargemultinationalslikeAppleorGEthathaveto
maintainhundredsofbankaccountsinlocalcurrenciesaroundtheworldjustto
facilitatetheiroperations.
2
Whensuchacorporationneedstomovemoney
betweentwosubsidiariesintwodifferentcountries,themanagerofone
subsidiarysendsabankwirefromhisoperation’sbankaccounttotheother
subsidiary’sbankaccount.Thesetransfersareneedlesslycomplicatedandtake
days,sometimesweekstosettle.Duringthattime,neithersubsidiarycanusethe
moneytofundoperationsorinvestment,buttheintermediariescanearninterest
onthefloat.“Theadventoftechnologyessentiallytookpaper-basedprocesses
andturnedthemintosemiautomated,semielectronicprocessesbutthelogicwas
stillpaperbased,”saidVikramPandit,formerCEOofCitigroup.
3
Aroundeverycorner,anotherbizarreparadox:Tradersbuyandsell
securitiesontheworld’sstockexchangesinnanoseconds;theirtradesclear
instantlybuttakethreefulldaystosettle.Localgovernmentsusenofewerthan
tendifferentagents—advisers,lawyers,insurers,bankers,andmore—to
facilitatetheissuanceofamunicipalbond.
4
AdaylaborerinLosAngelescashes
hispaycheckatamoneymartfora4percentfee,andthenwalkshisfistfulof
dollarsovertoaconveniencestoretowireithometohisfamilyinGuatemala,
wherehegetsdingedagainonflatfees,exchangerates,andotherhiddencosts.
Oncehisfamilyhasdivviedupthesumamongitsmanymembers,nobodyhas
enoughtoopenabankaccountorgetcredit.Theyareamongthe2.2billion
peoplewholiveonlessthantwodollarsaday.
5
Thepaymentstheyneedtomake
aretiny,toosmallforconventionalpaymentnetworkssuchasdebitandcredit
cards,whereminimumfeesmakeso-calledmicropaymentsimpossible.Banks
simplydon’tviewservingthesepeopleasa“profitableproposition,”according
toarecentHarvardBusinessSchoolstudy.
6
Andsothemoneymachineisn’t
trulyglobalinscaleandscope.
Monetarypolicymakersandfinancialregulatorsoftenfindthemselves
lackingallthefacts,thankstotheplannedopacityofmanylargefinancial
operationsandthecompartmentalizationofoversight.Theglobalfinancialcrisis
of2008wasacaseinpoint.Excessleverage,alackoftransparency,andasense
ofcomplacencydrivenbyskewedincentivespreventedanyonefromidentifying
theproblemuntilitwasnearlytoolate.“Howcanyouhaveanythingwork,from
thepoliceforcetoamonetarysystem,ifyoudon’thavenumbersandlocations?”
ponderedHernandodeSoto.
7
Regulatorsarestilltryingtomanagethismachine
withrulesdevisedfortheindustrialage.InNewYorkState,moneytransmission
lawsdatebacktotheCivilWarwhentheprimarymeansofmovingmoney
aroundwashorseandbuggy.
It’sFranken-finance,fullofabsurdcontradictions,incongruities,hotpipes,
andpressurepots.Why,forexample,doesWesternUnionneed500,000points
ofsalearoundtheworld,whenmorethanhalftheworld’spopulationhasasmart
phone?
8
ErikVoorhees,anearlybitcoinpioneerandoutspokencriticofthe
bankingsystem,toldus,“ItisfastertomailananviltoChinathanitistosend
moneythroughthebankingsystemtoChina.That’scrazy!Moneyisalready
digital,it’snotlikethey’reshippingpalletsofcashwhenyoudoawire!”
9
Whyisitsoinefficient?AccordingtoPaulDavid,theeconomistwhocoined
thetermproductivityparadox,layingnewtechnologiesoverexisting
infrastructureis“notunusualduringhistoricaltransitionsfromonetechnological
paradigmtothenext.”
10
Forexample,manufacturersneededfortyyearsto
embracecommercialelectrificationoversteampower,andoftenthetwoworked
sidebysidebeforemanufacturersfinallyswitchedoverforgood.Duringthat
periodofretrofitting,productivityactuallydecreased.Inthefinancialsystem,
however,theproblemiscompoundedbecausetherehasbeennocleantransition
fromonetechnologytothenext;therearemultiplelegacytechnologies,some
hundredsofyearsold,neverquitelivinguptotheirfullpotential.
Why?Inpart,becausefinanceisamonopolybusiness.Inhisassessmentof
thefinancialcrisis,NobellaureateJosephStiglitzwrotethatbanks“weredoing
everythingtheycouldtoincreasetransactioncostsineverywaypossible.”He
arguedthat,evenattheretaillevel,paymentsforbasicgoodsandservices
“shouldcostafractionofapenny.”“Yethowmuchdotheycharge?”he
wondered.“One,two,orthreepercentofthevalueofwhatissoldormore.
Capitalandsheerscale,combinedwitharegulatoryandsociallicensetooperate
allowsbankstoextractasmuchastheycan,incountryaftercountry,especially
intheUnitedStates,makingbillionsofdollarsofprofits.”
11
Historically,the
opportunityforlargecentralizedintermediarieshasbeenenormous.Notonly
traditionalbanks(e.g.,BankofAmerica),butalsochargecardcompanies(Visa),
investmentbanks(GoldmanSachs),stockexchanges(NYSE),clearinghouses
(CME),wire/remittanceservices(WesternUnion),insurers(Lloyd’s),securities
lawfirms(Skadden,Arps),centralbanks(FederalReserve),assetmanagers
(BlackRock),accountancies(Deloitte),consultancies(Accenture),and
commoditiestraders(VitolGroup)makeupthisexpansiveleviathan.Thegears
ofthefinancialsystem—powerfulintermediariesthatconsolidatecapitaland
influenceandoftenimposemonopolyeconomics—makethesystemwork,but
alsoslowitdown,addcost,andgenerateoutsizedbenefitsforthemselves.
Becauseoftheirmonopolyposition,manyincumbentshavenoincentiveto
improveproducts,increaseefficiency,improvetheconsumerexperience,or
appealtothenextgeneration.
ANEWLOOKFORTHEWORLD’SSECOND-OLDESTPROFESSION
ThedaysofFranken-financearenumberedasblockchaintechnologypromises
tomakethenextdecadeoneofgreatupheavalanddislocationbutalsoimmense
opportunityforthosewhoseizeit.Theglobalfinancialservicesindustrytodayis
fraughtwithproblems:Itisantiquated,builtondecades-oldtechnologythatisat
oddswithourrapidlyadvancingdigitalworld,makingitoftentimesslowand
unreliable.Itisexclusive,leavingbillionsofpeoplewithnoaccesstobasic
financialtools.Itiscentralized,exposingittodatabreaches,otherattacks,or
outrightfailure.Anditismonopolistic,reinforcingthestatusquoandstifling
innovation.Blockchainpromisestosolvetheseproblemsandmanymoreas
innovatorsandentrepreneursdevisenewwaystocreatevalueonthispowerful
platform.
Therearesixkeyreasonswhyblockchaintechnologywillbringabout
profoundchangestothisindustry,bustingthefinancemonopoly,andoffering
individualsandinstitutionsalikerealchoiceinhowtheycreateandmanage
value.Industryparticipantstheworldovershouldtakenotice.
Attestation:Forthefirsttimeinhistory,twopartieswhoneitherknow
nortrusteachothercantransactanddobusiness.Verifyingidentityand
establishingtrustisnolongertherightandprivilegeofthefinancial
intermediary.Moreover,inthecontextoffinancialservices,thetrust
protocoltakesonadoublemeaning.Theblockchaincanalsoestablish
trustwhentrustisneededbyverifyingtheidentityandcapacityofany
counterpartythroughacombinationofpasttransactionhistory(onthe
blockchain),reputationscoresbasedonaggregatereviews,andother
socialandeconomicindicators.
Cost:Ontheblockchain,thenetworkbothclearsandsettlespeer-to-
peervaluetransfers,anditdoessocontinuallysothatitsledgeris
alwaysuptodate.Forstarters,ifbanksharnessedthatcapability,they
couldeliminateanestimated$20billioninback-officeexpenseswithout
changingtheirunderlyingbusinessmodel,accordingtotheSpanish
bankSantander,thoughtheactualnumberissurelymuchgreater.
12
With
radicallylowercosts,bankscouldofferindividualsandbusinesses
greateraccesstofinancialservices,markets,andcapitalinunderserved
communities.Thiscanbeaboonnotonlytoincumbentsbutalsoto
scrappyupstartsandentrepreneurseverywhere.Anyone,anywhere,with
asmartphoneandanInternetconnectioncouldtapintothevastarteries
ofglobalfinance.
Speed:Today,remittancestakethreetosevendaystosettle.Stocktrades
taketwotothreedays,whereasbankloantradestakeonaveragea
staggeringtwenty-threedaystosettle.
13
TheSWIFTnetworkhandles
fifteenmillionpaymentordersadaybetweententhousandfinancial
institutionsgloballybuttakesdaystoclearandsettlethem.
14
Thesame
istrueoftheAutomatedClearingHouse(ACH)system,whichhandles
trillionsofdollarsofU.S.paymentsannually.Thebitcoinnetworktakes
anaverageoftenminutestoclearandsettlealltransactionsconducted
duringthatperiod.Otherblockchainnetworksareevenfaster,andnew
innovations,suchastheBitcoinLightningNetwork,aimtodramatically
scalethecapacityofthebitcoinblockchainwhiledroppingsettlement
andclearingtimestoafractionofasecond.
15
“Inthecorresponding
bankingworld,whereyouhaveasenderinonenetworkandareceiver
inanother,youhavetogothroughmultipleledgers,multiple
intermediaries,multiplehops.Thingscanliterallyfailinthemiddle.
There’sallkindsofcapitalrequirementsforthat,”saidRippleLabsCEO
ChrisLarsen.
16
Indeed,theshifttoinstantandfrictionlessvaluetransfer
wouldfreeupcapitalotherwisetrappedintransit,badnewsforanyone
profitingfromthefloat.
RiskManagement:Blockchaintechnologypromisestomitigateseveral
formsoffinancialrisk.Thefirstissettlementrisk,theriskthatyour
tradewillbouncebackbecauseofsomeglitchinthesettlementprocess.
Thesecondiscounterpartyrisk,theriskthatyourcounterpartywill
defaultbeforesettlingatrade.Themostsignificantissystemicrisk,the
totalsumofalloutstandingcounterpartyriskinthesystem.Vikram
PanditcalledthisHerstattrisk,namedafteraGermanbankthatcouldn’t
meetitsliabilitiesandsubsequentlywentunder:“Wefoundthroughthe
financialcrisisoneoftheriskswas,ifI’mtradingwithsomebody,how
doIknowthey’regoingtosettleontheotherside?”Accordingto
Pandit,instantsettlementontheblockchaincouldeliminatethatrisk
completely.Accountantscouldlookintotheinnerworkingsofa
companyatanypointintimeandseewhichtransactionswereoccurring
andhowthenetworkwasrecordingthem.Irrevocabilityofatransaction
andinstantreconciliationoffinancialreportingwouldeliminateone
aspectofagencyrisk—theriskthatunscrupulousmanagerswillexploit
thecumbersomepapertrailandsignificanttimedelaytoconceal
wrongdoing.
ValueInnovation:Thebitcoinblockchainwasdesignedformoving
bitcoins,notforhandlingotherfinancialassets.However,the
technologyisopensource,invitingexperimentation.Someinnovators
aredevelopingseparateblockchains,knownasaltcoins,builtfor
somethingotherthanbitcoinpayments.Othersarelookingtoleverage
thebitcoinblockchain’ssizeandliquiditytocreate“spin-off”coinson
so-calledsidechainsthatcanbe“colored”torepresentanyassetor
liability,physicalordigital—acorporatestockorbond,abarrelofoil,a
barofgold,acar,acarpayment,areceivableorapayable,orofcourse
acurrency.Sidechainsareblockchainsthathavedifferentfeaturesand
functionsfromthebitcoinblockchainbutthatleveragebitcoin’s
establishednetworkandhardwareinfrastructurewithoutdiminishingits
securityfeatures.Sidechainsinteroperatewiththeblockchainthrougha
two-waypeg,acryptographicmeansoftransferringassetsoffthe
blockchainandbackagainwithoutathirdpartyexchange.Othersstill
aretryingtoremovethecoinortokenaltogether,buildingtrading
platformsonprivateblockchains.Financialinstitutionsarealreadyusing
blockchaintechnologytorecord,exchange,andtradeassetsand
liabilities,andcouldeventuallyuseittoreplacetraditionalexchanges
andcentralizedmarkets,upendinghowwedefineandtradevalue.
OpenSource:Thefinancialservicesindustryisatechnologystackof
legacysystemsstandingtwentymileshighandonthevergeofteetering
over.Changesaredifficulttomakebecauseeachimprovementmustbe
backwardcompatible.Asopensourcetechnology,blockchaincan
constantlyinnovate,iterate,andimprove,basedonconsensusinthe
network.
Thesebenefits—attestation,dramaticallylowercosts,lightningspeed,lower
risks,greatinnovationofvalue,adaptability—havethepotentialtotransformnot
onlypayments,butalsothesecuritiesindustry,investmentbanking,accounting
andaudit,venturecapital,insurance,enterpriseriskmanagement,retailbanking,
andotherpillarsoftheindustry.Readon.
THEGOLDENEIGHT:HOWTHEFINANCIALSERVICESSECTOR
WILLCHANGE
Herearewhatwebelievetobetheeightcorefunctionsripefordisruption.They
arealsosummarizedinthetablehere.
1.AuthenticatingIdentityandValue:Todaywerelyonpowerful
intermediariestoestablishtrustandverifyidentityinafinancial
transaction.Theseintermediariesaretheultimatearbitersforaccessto
basicfinancialservices,suchasbankaccountsandloans.Blockchain
lowersandsometimeseliminatestrustaltogetherincertaintransactions.
Thetechnologywillalsoenablepeerstoestablishidentitythatis
verifiable,robust,andcryptographicallysecureandtoestablishtrust
whentrustisneeded.
2.MovingValue:Daily,thefinancialsystemmovesmoneyaroundthe
world,makingsurethatnodollarisspenttwice:fromtheninety-nine-
centpurchaseofasongoniTunestothetransferofbillionsofdollarsto
settleanintracompanyfundtransfer,purchaseanasset,oracquirea
company.Blockchaincanbecomethecommonstandardforthe
movementofanythingofvalue—currencies,stocks,bonds,andtitles—
inbatchesbigandsmall,todistancesnearandfar,andtocounterparties
knownandunknown.Thus,blockchaincandoforthemovementof
valuewhatthestandardshippingcontainerdidforthemovementof
goods:dramaticallylowercost,improvespeed,reducefriction,and
boosteconomicgrowthandprosperity.
3.StoringValue:Financialinstitutionsaretherepositoriesofvaluefor
people,institutions,andgovernments.FortheaverageJoe,abankstores
valueinasafetydepositbox,asavingsaccount,oracheckingaccount.
Forlargeinstitutionsthatwantreadyliquiditywiththeguaranteeofa
smallreturnontheircashequivalents,so-calledrisk-freeinvestments
suchasmoneymarketfundsorTreasurybillswilldothetrick.
Individualsneednotrelyonbanksastheprimarystoresofvalueoras
providersofsavingsandcheckingaccounts,andinstitutionswillhavea
moreefficientmechanismtobuyandholdrisk-freefinancialassets.
4.LendingValue:FromhouseholdmortgagestoT-bills,financial
institutionsfacilitatetheissuanceofcreditsuchascreditcarddebt,
mortgages,corporatebonds,municipalbonds,governmentbonds,and
asset-backedsecurities.Thelendingbusinesshasspawnedanumberof
ancillaryindustriesthatperformcreditchecks,creditscores,andcredit
ratings.Fortheindividual,it’sacreditscore.Foraninstitution,it’sa
creditrating—frominvestmentgradetojunk.Ontheblockchain,anyone
willbeabletoissue,trade,andsettletraditionaldebtinstruments
directly,therebyreducingfrictionandriskbyincreasingspeedand
transparency.Consumerswillbeabletoaccessloansfrompeers.Thisis
particularlysignificantfortheworld’sunbankedandforentrepreneurs
everywhere.
5.ExchangingValue:Daily,marketsgloballyfacilitatetheexchangeof
trillionsofdollarsoffinancialassets.Tradingisthebuyingandselling
ofassetsandfinancialinstrumentsforthepurposeofinvesting,
speculating,hedging,andarbitragingandincludestheposttradelife
cycleofclearing,settling,andstoringvalue.Blockchaincutssettlement
timesonalltransactionsfromdaysandweekstominutesandseconds.
Thisspeedandefficiencycreatesopportunitiesforunbankedand
underbankedpeopletoparticipateinwealthcreation.
6.FundingandInvesting:Investinginanasset,company,ornew
enterprisegivesanindividualtheopportunitytoearnareturn,inthe
formofcapitalappreciation,dividends,interest,rents,orsome
combination.Theindustrymakesmarkets:matchinginvestorswith
entrepreneursandbusinessownersateverystageofgrowth—from
angelstoIPOsandbeyond.Raisingmoneynormallyrequires
intermediaries—investmentbankers,venturecapitalists,andlawyersto
nameafew.Theblockchainautomatesmanyofthesefunctions,enables
newmodelsforpeer-to-peerfinancing,andcouldalsomakerecording
dividendsandpayingcouponsmoreefficient,transparent,andsecure.
7.InsuringValueandManagingRisk:Riskmanagement,ofwhich
insuranceisasubset,isintendedtoprotectindividualsandcompanies
fromuncertainlossorcatastrophe.Morebroadly,riskmanagementin
financialmarketshasspawnedmyriadderivativeproductsandother
financialinstrumentsmeanttohedgeagainstunpredictableor
uncontrollableevents.Atlastcountthenotionalvalueofalloutstanding
over-the-counterderivativesis$600trillion.Blockchainsupports
decentralizedmodelsforinsurance,makingtheuseofderivativesfor
riskmanagementfarmoretransparent.Usingreputationalsystemsbased
onaperson’ssocialandeconomiccapital,theiractions,andother
reputationalattributes,insurerswillhaveamuchclearerpictureofthe
actuarialriskandcanmakemoreinformeddecisions.
8.AccountingforValue:Accountingisthemeasurement,processing,
andcommunicationoffinancialinformationabouteconomicentities.It
isamultibillion-dollarindustrycontrolledbyfourmassiveauditfirms—
DeloitteToucheTohmatsu,PricewaterhouseCoopers,Ernst&Young,
andKPMG.Traditionalaccountingpracticeswillnotsurvivethe
velocityandcomplexityofmodernfinance.Newaccountingmethods
usingblockchain’sdistributedledgerwillmakeauditandfinancial
reportingtransparentandoccurinrealtime.Itwillalsodramatically
improvethecapacityforregulatorsandotherstakeholderstoscrutinize
financialactionswithinacorporation.
FROMSTOCKEXCHANGESTOBLOCKEXCHANGES
“WallStreethaswokenupinabigway,”
17
saidAustinHillofBlockstream.He
wasspeakingofthefinancialindustry’sdeepinterestinblockchaintechnologies.
ConsiderBlytheMasters,oneofthemostpowerfulpeopleonWallStreet.She
builtJPMorgan’sderivativesandcommoditiesdeskintoaglobaljuggernautand
pioneeredthederivativesmarket.Afterabriefpseudoretirement,shejoineda
NewYork–basedstart-up,DigitalAssetHoldings,asCEO.Thedecision
surprisedmany.Sheunderstoodthatthe
THEGOLDENEIGHT
BlockchainTransformationsofFinancialServices
FUNCTION BLOCKCHAINIMPACT STAKEHOLDER
1.AuthenticatingIdentityand
Value
Verifiableandrobustidentities,
cryptographicallysecured
Ratingagencies,consumerdata
analytics,marketing,retailbanking,
wholesalebanking,paymentcard
networks,regulators
2.MovingValue—makea
payment,transfermoney,and
purchasegoodsandservices
Transferofvalueinverylargeandvery
smallincrementswithoutintermediarywill
dramaticallyreducecostandspeedof
payments
Retailbanking,wholesalebanking,
paymentcardnetworks,moneytransfer
services,telecommunications,
regulators
3.StoringValue—currencies,
commodities,andfinancialassets
arestoresofvalue.Safetydeposit
box,asavingsaccount,ora
checkingaccount.Moneymarket
fundsorTreasurybills
Paymentmechanismcombinedwitha
reliableandsafestoreofvaluereducesneed
fortypicalfinancialservices;banksavings
andcheckingaccountswillbecomeobsolete
Retailbanking,brokerages,investment
banking,assetmanagement,
telecommunications,regulators
4.LendingValue—creditcard
debt,mortgages,corporatebonds,
Debtcanbeissued,traded,andsettledon
theblockchain;increasesefficiency,reduces
Wholesale,commercial,andretail
banking,publicfinance(i.e.,
municipalbonds,government
bonds,asset-backedsecurities,
andotherformsofcredit
friction,improvessystemicrisk.Consumers
canusereputationtoaccessloansfrom
peers;significantfortheworld’sunbanked
andforentrepreneurs
governmentfinance),microlending,
crowdfunding,regulators,creditrating
agencies,creditscoresoftware
companies
5.ExchangingValue—
speculating,hedging,and
arbitraging.Matchingorders,
clearingtrades,collateral
managementandvaluation,
settlementandcustody
Blockchaintakessettlementtimesonall
transactionsfromdaysandweekstominutes
andseconds.Thisspeedandefficiencyalso
createsopportunitiesforunbankedand
underbankedtoparticipateinwealth
creation
Investment,wholesalebanking,foreign
exchangetraders,hedgefunds,pension
funds,retailbrokerage,clearinghouses,
stock,futures,commoditiesexchanges;
commoditiesbrokerages,centralbanks,
regulators
6.FundingandInvestinginan
Asset,Company,Start-up—
capitalappreciation,dividends,
interest,rents,orsome
combination
Newmodelsforpeer-to-peerfinancing,
recordingofcorporateactionssuchas
dividendspaidautomaticallythroughsmart
contracts.Titlesregistrytoautomateclaims
torentalincomeandotherformsofyield
Investmentbanking,venturecapital,
legal,audit,propertymanagement,
stockexchanges,crowdfunding,
regulators
7.InsuringValueandManaging
Risk—protectassets,homes,
lives,health,businessproperty,
andbusinesspractices,derivative
products
Usingreputationalsystems,insurerswill
betterestimateactuarialrisk,creating
decentralizedmarketsforinsurance.More
transparentderivatives
Insurance,riskmanagement,wholesale
banking,brokerage,clearinghouses,
regulators
8.AccountingforValue—new
corporategovernance
Distributedledgerwillmakeauditand
financialreportingrealtime,responsive,and
transparent,willdramaticallyimprove
capacityofregulatorstoscrutinizefinancial
actionswithinacorporation
Audit,assetmanagement,shareholder
watchdogs,regulators
blockchainwouldtransformherbusinessastheInternettransformedother
industries:“Iwouldtakeitaboutasseriouslyasyoushouldhavetakenthe
conceptoftheInternetinthe1990s.It’sabigdealanditisgoingtochangethe
wayourfinancialworldoperates.”
18
Mastershaddismissedmanyoftheearlytalesofbitcoin,exploitedbydrug
dealers,harnessedbygamblers,andhailedbylibertariansascreatinganew
worldorder.Thatchangedinlate2014.Masterstoldus,“Ihadan‘ahamoment’
whereIbegantoappreciatethepotentialimplicationsofthetechnologyforthe
worldthatIknewwell.Whilstthecryptocurrencyapplicationofthedistributed
ledgerstechnologywasinterestingandhadimplicationsforpayments,the
underlyingdatabasetechnologyitselfhadfarbroaderimplications.”
19
According
toMasters,blockchaincouldreduceinefficienciesandcosts“byallowing
multiplepartiestorelyonthesameinformationratherthanduplicatingand
replicatingitandhavingtoreconcileit.”Asamechanismforshared,
decentralized,replicatedtransactionrecords,blockchainisthe“goldensource,”
shesays.
20
“Bearinmindthatfinancialservicesinfrastructureshavenotevolvedin
decades.Thefrontendhasevolvedbutnotthebackend,”saysMasters.“It’s
beenanarmsraceintechnologyinvestmentorientedtowardspeedingup
transactionexecutionsothat,nowadays,competitiveadvantagesaremeasuredin
fractionsofnanoseconds.Theironyisthattheposttradeinfrastructurehasn’t
reallyevolvedatall.”Itstilltakes“daysandinsomecasesweeksofdelaytodo
theposttradeprocessingthatgoesintoactuallysettlingfinancialtransactionsand
keepingrecordofthem.”
21
Mastersisnotaloneinherenthusiasmforblockchaintechnology.NASDAQ
CEOBobGreifeldsaid,“Iamabigbelieverintheabilityofblockchain
technologytoeffectfundamentalchangeintheinfrastructureofthefinancial
serviceindustry.”
22
Greifeldisintegratingblockchain’sdistributedledger
technologyintoNASDAQ’sprivatemarketsplatformthroughaplatformcalled
NASDAQLinq.Exchangesarecentralizedmarketplacesforsecuritiesandthey
arealsoripefordisruption.OnJanuary1,2016,NASDAQLinqcompletedits
firsttradeonblockchain.AccordingtoBlockstream’sHill,oneofthelargest
assetmanagersintheworld“hasmorepeoplededicatedtoitsblockchain
innovationgroupthanwehaveinourentirecompany.”Hill’scompanyhas
raisedover$75millionandemploysmorethantwentypeople.“Theseguysare
seriousaboutmakingsurethattheyunderstandhowtheycanusethetechnology
tochangehowtheydobusiness.”
23
TheNYSE,GoldmanSachs,Santander,
Deloitte,RBC,Barclays,UBS,andvirtuallyeverymajorfinancialfirmglobally
havetakenasimilarseriousinterest.In2015,WallStreet’sopinionof
blockchaintechnologybecameuniversallypositive:inonestudy,94percentof
respondentssaidblockchaincouldplayanimportantroleinfinance.
24
AlthoughmanyotherapplicationspiquetheinterestofWallStreet,what
interestsfinancialexecutiveseverywhereisthenotionofusingtheblockchainto
processanytradesecurelyfrombeginningtoend,whichcoulddramatically
lowercosts,increasespeedandefficiency,andmitigateriskintheirbusinesses.
Masterssaid,“Theentirelifecycleofatradeincludingitsexecution,thenetting
ofmultipletradesagainsteachother,thereconciliationofwhodidwhatwith
whomandwhethertheyagree,canoccuratthetradeentrylevel,muchearlierin
thestackofprocess,thanoccursinthemainstreamfinancialmarket.”
25
Greifeld
putitthisway:“Wecurrentlysettletrades‘T+3’(thatis,threedays).Whynot
settleinfivetotenminutes?”
26
WallStreettradesinrisk,andthistechnologycanmateriallyreduce
counterpartyrisk,settlementrisk,andthussystemicriskacrossthesystem.Jesse
McWaters,financialinnovationleadattheWorldEconomicForum,toldus,
“Themostexcitingthingaboutdistributedledgertechnologyishowtraceability
canimprovesystemicstability.”Hebelievesthese“newtoolsallowregulatorsto
usealightertouch.”
27
Theblockchain’spublicnature—itstransparency,its
searchability—plusitsautomatedsettlementandimmutabletimestamps,allow
regulatorstoseewhat’shappening,evensetupalertssothattheydon’tmiss
anything.
DR.FAUST’SBLOCKCHAINBARGAIN
Banksandtransparencyrarelygohandinhand.Mostfinancialactorsgain
competitiveadvantagefrominformationasymmetriesandgreaterknow-how
thantheircounterparties.However,thebitcoinblockchainasconstructedisa
radicallytransparentsystem.Forbanks,thismeansopeningthekimono,soto
speak.Sohowdowereconcileanopenplatformwiththeclosed-doorpolicyof
banks?
AustinHillcalleditWallStreet’s“Faustianbargain,”anoneroustrade-off.
28
“Peoplelovetheideaofnothavingtowaitthreedaystosettletransactionsbut
havingthemclearedwithinminutesandknowingthatthey’refinalandthat
they’retrue,”saidHill.“Thecounterparttothatisalltransactionsonthe
[bitcoin]blockchainarecompletelypublic.Thatterrifiesanumberofpeopleon
WallStreet.”Thesolution?Confidentialtransactionsonso-calledpermissioned
blockchains,alsoknownasprivateblockchains.Whereasthebitcoinblockchain
isentirelyopenandpermissionless—thatis,anyonecanaccessitandinteract
withit—permissionedblockchainsrequireuserstohavecertaincredentials,
givingthemalicensetooperateonthatparticularblockchain.Hillhasdeveloped
thetechnologywherebyonlyafewstakeholdersseethevariouscomponentsofa
transactionandcanensureitsintegrity.
Atfirstblush,privateandpermissionedblockchainswouldappeartohavea
fewclearadvantages.Forone,itsmemberscaneasilychangetherulesofthe
blockchainiftheysodesire.Costscanbekeptdownastransactionsneedonly
validationfromthemembersthemselves,removingtheneedforanonymous
minerswhouselotsofelectricity.Also,becauseallpartiesaretrusted,a51
percentattackisunlikely.Nodescanbetrustedtobewellconnected,asinmost
usecasestheyarelargefinancialinstitutions.Furthermore,theyareeasierfor
regulatorstomonitor.However,theseadvantagesalsocreateweaknesses.The
easieritistochangetherules,themorelikelyamemberistofloutthem.Private
blockchainsalsopreventthenetworkeffectsthatenableatechnologytoscale
rapidly.Intentionallylimitingcertainfreedomsbycreatingnewrulescaninhibit
neutrality.Finally,withnoopenvalueinnovation,thetechnologyismorelikely
tostagnateandbecomevulnerable.
29
Thisisnottosayprivateblockchains
won’tflourish,butfinancialservicesstakeholdersmuststilltaketheseconcerns
seriously.
RippleLabs,whichhasgainedtractionwithinbankingcircles,isdeveloping
othercleverwaystorelieveFaust.“RippleLabsisaimedatwholesalebanking,
andweuseaconsensusmethod,ratherthanaproof-of-worksystem,”saidCEO
ChrisLarsen,meaningnominersandnoanonymousnodesarevalidating
transactions.
30
ThecompanyChainhasitsownstrategy.With$30millionin
fundingfromVisa,NASDAQ,Citi,CapitalOne,Fiserv,andOrange,Chain
plansonbuildingenterprise-focusedblockchainsolutions,targetingthefinancial
servicesindustryfirst,whereitalreadyhasadealwithNASDAQ.“Allassetsin
thefuturewillbedigitalbearerinstrumentsrunningonmultipleblockchains,”
arguedChainCEOAdamLudwin.Butthiswon’tbethesiloedworldWallStreet
isaccustomedto,“becauseeveryoneisbuildingonthesameopenspecs.”
31
Wall
Streetersmightwanttocapturethistechnology,buttheywillhavetocontend
withthevalueinnovationitenables,somethingtheycan’tcontrolorpredict.
Mastersalsoseesthevirtuesofpermissionedblockchains.Forher,onlya
smallcoterieoftradingpartners,somevendorsandothercounterparties,and
regulatorsneedhaveaccess.Thoseselectfewchosenwillbegrantedblockchain
credentials.ToMasters,“permissionedledgershavetheadvantageofnever
exposingaregulatedfinancialinstitutiontotheriskofeithertransactingwithan
unknownparty,anunacceptableactivityfromaregulatorypointofview,or
creatingadependencyuponanunknownserviceprovidersuchasatransaction
processor,alsounacceptablefromaregulatorypointofview.”
32
These
permissionedblockchains,orprivatechains,appealtotraditionalfinancial
institutionswaryofbitcoinandeverythingassociatedwithit.
WhileBlytheMastersistheCEOofastart-up,herkeeninterestrepresents
broaderinvolvementoftraditionalfinancialactorsinthissector.Thisembraceof
newtechnologyreflectsagrowingconcernthattechstart-upscanalsoupend
highfinance.ForEricPisciniofDeloitte,whoseclientshaveundergoneagreat
awakeningoverthepastyear,the“suddeninterestintechwasnotsomethingthat
anyonewasexpecting.”
33
Theenthusiasmisspreadinglikeacontagioninto
someofthelargestandoldestfinancialinstitutionsintheworld.
Barclaysisoneofdozensoffinancialinstitutionsexploringopportunitiesin
blockchaintechnology.AccordingtoDerekWhite,Barclays’schiefdesignand
digitalofficer,“technologiesliketheblockchainaregoingtoreshapeour
industry.”Whiteisbuildinganopeninnovationplatformthatwillallowthebank
toengageawidearrayofbuildersandthinkersinthisindustry.“We’rekeento
beshapers.Butwe’realsokeentoconnectwiththeshapersofthetechnologies
andthetranslatorsofthosetechnologies,”hesaid.
34
Barclaysisputtingits
moneywhereitsmouthis,cuttingtensofthousandsofjobsintraditionalareas
anddoublingdownontechnology,notablybylaunchingtheBarclays
Accelerator.AccordingtoWhite,“threeoutofthetencompaniesinourlast
cohortwereblockchainorbitcoincompanies.Blockchainisthegreatest
evidenceoftheworldmovingfromclosedsystemstoopensystemsandhas
hugepotentialimpactonthefutureofnotjustfinancialservicesbutmany
industries.”
35
Bankstalkingaboutopensystems—monDieu!
TheFinancialUtility
Intheautumnof2015,nineoftheworld’slargestbanks—Barclays,JPMorgan,
CreditSuisse,GoldmanSachs,StateStreet,UBS,RoyalBankofScotland,
BBVA,andCommonwealthBankofAustralia—announcedaplantocollaborate
oncommonstandardsforblockchaintechnology,dubbedtheR3Consortium.
Thirty-twomorehavesincejoinedtheeffortandeveryfewweeksanewbatch
oftheindustry’sWho’sWhosignsup.
36
Questionsremainabouthowseriously
thesebanksaretakingtheinitiative.Afterall,thebarriertojoiningthegroupisa
commitmentofonly$250,000,yetR3’sformationmarksaclearleapforwardfor
theindustry.Settingstandardsiscriticaltoaccelerateadoptionandusageofa
newtechnologyandsoweareoptimisticabouttheinitiative.R3haspoached
someoftheleadingvisionariesandtechnicalpractitionersinthesectortomove
theballforward.MikeHearnjoinedinNovember,addingtoateamthatincludes
RichardGendalBrown,formerlytheexecutivearchitectforbankinginnovation
atIBM,andJamesCarlyle,nowchiefengineerofR3andex–chiefengineerat
Barclays.
37
InDecember2015,theLinuxFoundation,incollaborationwithahuge
groupofyetmoreblue-chipcorporatepartners,launchedanotherblockchain
initiative,dubbedtheHyperledgerProject.ThisisnotacompetitortoR3;
indeed,HyperledgerProjectcountsR3asafoundingmember,alongwith
Accenture,Cisco,CLS,DeutscheBörse,DigitalAssetHoldings,DTCC,Fujitsu
Limited,IC3,IBM,Intel,JPMorgan,theLondonStockExchangeGroup,
MitsubishiUFJFinancialGroup(MUFG),StateStreet,SWIFT,VMware,and
WellsFargo.
38
Still,itdemonstrateshowseriouslytheindustryistakingthis
technologyandalsohowreluctantitistoembracefullyopen,decentralized
blockchainslikebitcoin.UnlikeR3,HyperledgerProjectisanopensource
projectthathastaskedacommunitytodevelopa“blockchainforbusiness.”This
iscertainlylaudableandmayverywellwork.Butdon’tbemistaken:Thisisan
opensourceprojectdesignedtobuildgatedtechnologiesby,forexample,
limitingthenumberofnodesinanetworkorrequiringcredentials.AswithR3,
oneofHyperledgersprioritiesisstandardsetting.DavidTreatofAccenture,a
foundingmemberofthegroup,said,“Keytothisjourneyistohavestandards
andsharedplatformsthatareutilizedacrossindustryparticipants.”
Blockchainhasalsoopenedupabroaderdiscussionabouttheroleof
governmentsinoverseeingthefinancialservicesindustry.A“utility”conjures
imagesofnaturalmonopolies,highlyregulatedbythestate.However,because
blockchaintechnologypromisestoreducerisksandincreasetransparencyand
responsiveness,someindustryplayerssuggestthatthetechnologyitself
functionslikearegulation.
39
Ifregulatorscanpeerintotheinnerworkingsof
banksandmarkets,thensurelywecansimplifysomelawsandrepealothers,
right?Thisisatrickyquestiontoanswer.Ontheonehand,regulatorswillhave
torethinktheiroversightrole,giventhebreakneckpaceofinnovation.Onthe
otherhand,bankshaveatrackrecordofactingwithoutintegritywhen
governmentstepsaway.
Willthebigbanksreignsupremebydeployingtheblockchainwithout
bitcoin,cherry-pickingelementsofdistributedledgertechnologyandwelding
themtoexistingbusinessmodels?R3isonlyoneofmanysignsbanksare
movinginthisdirection.OnNovember19,2015,GoldmanSachsfiledapatent
for“methodsforsettlingsecuritiesinfinancialmarketsusingdistributed,peer-
to-peerandcryptographictechniques,”usingaproprietarycoincalled
SETLcoin.
40
Theironyofabankpatentingatechnologyoriginallyintendedas
anopensourcegifttotheworldisnotlostonus,norshoulditbeonyou.
PerhapsthisiswhatAndreasAntonopolousfearedwhenhewarnedanaudience
thatbankswouldturnbitcoinfrom“punkrocktosmoothjazz”?
41
Orperhaps
bankswillhavetocompetewithbest-in-classproductsandservicesamid
radicallydifferenttypesoforganizationswhoseleadersopposeeverythingthese
companiesrepresent.
Thefinancialutilityofthefuturecouldbeawalledandwell-groomed
garden,harvestedbyacabalofinfluentialstakeholders,oritcouldbeanorganic
andspaciousecosystem,wherepeople’seconomicfortunesgrowwhereverthere
islight.Thedebaterageson,butiftheexperienceofthefirstgenerationofthe
Internethastaughtusanything,it’sthatopensystemsscalemoreeasilythan
closedones.
THEBANKAPP:WHOWILLWININRETAILBANKING
TheGoogleofCapital—that’swhatJeremyAllaireisbuilding,“aconsumer
financecompanyprovidingproductstoconsumerstoholdmoney,sendmoney,
sendandreceivepayments;thefundamentalutilitiesthatpeopleexpectoutof
retailbanking.”
42
Heseesitasapowerful,instant,andfreeutilityforanyone
withaccesstoanInternet-enableddevice.Hiscompany,CircleInternet
Financial,isoneofthelargestandbest-fundedventuresinthespace.
CallCirclewhatyoulike,justdon’tcallitabitcoincompany.“Amazonwas
notanHTTPcompanyandGooglewasnotanSMTPcompany.Circleisnota
bitcoincompany,”saidAllaire.“Welookatbitcoinasanextgenerationof
fundamentalInternetprotocolsthatareusedinsocietyandtheeconomy.”
43
Allaireseesfinancialservicesasthelastholdouts,andperhapsthelargest
prize,tobefundamentallytransformedbytechnology.“Ifyoulookatretail
banking,therearethreeorfourthingsthatretailbanksdo.Oneisthatthey
provideaplacetostorevalue.Asecondisthattheyprovidesomekindof
paymentutility.Beyondthat,theyextendcreditandprovideaplaceforyouto
storewealthandgeneratepotentialincome.”
44
Hisvision:“Withinthreetofive
years,apersonshouldbeabletodownloadanapp,storevaluedigitallyin
whatevercurrencytheywant—dollars,euro,yen,renminbi,aswellasdigital
currency—andbeabletomakepaymentsinstantlyornearlyinstantlywith
globalinteroperability,withaveryhighlevelofsecurityandwithoutprivacy
leakage.Mostimportantly,itwillbefree.”
45
AstheInternettransformed
informationservices,theblockchainwilltransformfinancialservices,instigating
unimaginednewcategoriesofcapability.
AccordingtoAllaire,thebenefitsofblockchaintechnology—instant
settlement,globalinteroperability,highlevelsofsecurity,andnearlyno-cost
transactions—benefiteveryonewhetheryou’reapersonorabusiness.Andwhat
ofhisplantomakeitallfree?Heresy!saytheworld’sbankers.Surely,Goldman
SachsandtheChineseventurefirmIDGdidnotcommit$50milliontocreatea
nonprofitorpublicbenefitcompany!
46
“Ifwe’resuccessfulinbuildingouta
globalfranchisewithtensofmillionsofusersandwe’resittingatthecenterof
transactionbehaviorofusers,thenwearesittingonsomepowerfulassets.”
AllaireexpectsCircletohave“theunderlyingcapabilitiestodeliverother
financialproducts.”Thoughhewouldn’tspeaktoitspecifically,thefinancial
dataofmillionsofcustomerscouldbecomemorevaluabletothecompanythan
theirfinancialassets.“Wewanttoreinventtheconsumers’experienceandtheir
relationshiptomoneyandgivethemthechoiceofhowtheirmoneyisusedand
appliedandhowtheycangeneratemoneyfromtheirmoney.”
47
Leadersofthe
oldparadigm,takenotice.
CompanieslikeCircleareunburdenedbylegacyandculture.Theirfresh
approachcanbeabigadvantage.Manyofthegreatinnovatorsofthepastwere
consummateoutsiders.Netflixwasn’tinventedbyBlockbuster.iTuneswasn’t
inventedbyTowerRecords.Amazonwasn’tinventedbyBarnes&Noble—you
gettheidea.
StephenPair,CEOofBitPay,anearlymoverintheindustry,believes
newcomershaveadistinctadvantage.“Issuingfungibleassetslikeequities,
bonds,andcurrenciesontheblockchainandbuildingthenecessary
infrastructuretoscaleitandmakeitcommercialdon’trequireabankersCV,”
hesaid.Forone,“Youdon’trequireallthelegacyinfrastructureorinstitutions
thatmakeupWallStreettoday....Notonlycanyouissuetheseassetsonthe
blockchain,butyoucancreatesystemswhereIcanhaveaninstantaneous
atomictransactionwhereImighthaveApplestockinmywalletandIwantto
buysomethingfromyou.Butyouwantdollars.WiththisplatformIcanentera
singleatomictransaction(i.e.,allornone)andusemyApplestocktosendyou
dollars.”
48
Isitreallythateasy?Thebattletoreinventthefinancialservicesindustry
differsfromthebattlefore-commerceintheearlydaysoftheWeb.For
businesseslikeAllaire’stoscale,theymustfacilitateoneofthelargestvalue
transfersinhumanhistory,movingtrillionsofdollarsfrommillionsof
traditionalbankaccountstomillionsofCirclewallets.Notsoeasy.Banks,
despitetheirenthusiasmforblockchain,havebeenwaryofthesecompanies,
arguingblockchainbusinessesare“high-risk”merchants.Perhapstheir
reluctancestemsfromthefearofhasteningtheirowndemise.Intermediaries
havesprungupbetweentheoldandnewworlds.Vogogo,aCanadiancompany,
isalreadyworkingwithCoinbase,Kraken,BitPay,Bitstamp,andotherstoopen
bankaccounts,meetcompliancestandards,andenablecustomerstomove
moneyintobitcoinwalletsthroughtraditionalpaymentmethods.
49
Oh,theirony.
WhereasAmazoncouldleapfrogincumbentretailerswithease,theleadersof
thisnewparadigmmustplaynicewiththeleadersoftheold.
PerhapsweneedabankerwithSiliconValley’swillingnesstoexperiment.
SureshRamamurthifitsthatbill.TheIndian-bornformerGoogleexecutiveand
softwareengineersurprisedmanywhenhedecidedtobuyCBWBankinWier,
Kansas,population650.Forhim,thissmalllocalbankwasalaboratoryfor
usingtheblockchainprotocolandbitcoin-basedpaymentrailsforfreecross-
borderremittancepayments.Inhisview,would-beblockchainentrepreneurs
whodon’tunderstandthenuancesoffinancialservicesaredoomedtofail.He
said,“Theyaredrawingawindowonthebuilding.Makingitlookniceand
colorful.Butyoucan’tassesstheproblemfromtheoutside.Youneedtotalkto
someonefrominsidethebuilding,whoknowstheplumbing.”
50
Inthepastfive
years,Sureshhasservedasthebank’sCEO,CIO,chiefcomplianceofficer,
teller,janitor,and,yes,plumber.Sureshnowknowstheplumbingofbanking.
ManyWallStreetveteransdon’tseeabattlebetweenoldandnew.Blythe
Mastersbelievesthereare“atleastasmanywaysforbankstoimprovethe
efficiencyandoperationsofWallStreetasthereareopportunitiesfordisruption
fromnewentrants.”
51
Wecan’thelpfeelingthetidesturningtowardtheradically
new.That’swhytheBigThreeTVnetworksdidn’tcomeupwithYouTube,why
theBigThreeautomakersdidn’tcomeupwithUber,whytheBigThreehotel
chainsdidn’tcomeupwithAirbnb.BythetimetheC-suitesoftheFortune1000
decidetopursueanewavenueofgrowth,anewentranthasbroadsidedthem
withspeed,agility,andasuperioroffering.Regardlessofwholandsontop,the
collisionbetweentheunstoppableforceoftechnologicalchangeandthe
immovableobjectoffinancialservices,themostentrenchedindustryinthe
world,promisestobeanintenseone.
GOOGLETRANSLATEFORBUSINESS:NEWFRAMEWORKSFOR
ACCOUNTINGANDCORPORATEGOVERNANCE
“Accountantsarelikemushrooms—they’rekeptinthedarkandfedshit,”
52
said
TomMornini,CEOofSubledger,astart-uptargetingtheaccountingindustry.
Accountinghasbecomeknownasthelanguageoffinance,unintelligibletoall
butafewdisciples.Ifeverytransactionisavailableonashared,globally
distributedledger,thenwhywouldweneedpublicaccountanciestotranslatefor
us?
ModernaccountingsprangfromthecuriousmindofLucaPacioliinItaly
duringthefifteenthcentury.Hisdeceptivelysimpleinventionwasaformula
knownasdouble-entryaccounting,whereeverytransactionhastwoeffectson
eachparticipant,thatis,eachmustenterbothadebitandacreditontothe
balancesheet,theledgerofcorporateassetsandliabilities.Bycodifyingthese
rules,Pacioliprovidedordertoanotherwiseadhocpracticethatprevented
enterprisesfromscaling.
RonaldCoasethoughtaccountingwascultlike.Whileastudentatthe
LondonSchoolofEconomics,Coasesaw“aspectsofareligion”inthepractice.
“Thebooksentrustedtotheaccountants’keepingwereapparentlysacredbooks.”
Accountingstudentsdeemedhischallenges“sacrilegious.”
53
Howdarehe
questiontheir“manymethodsofcalculatingdepreciation,valuinginventories,
allocatingon-costs,andsoon,allofwhichgavedifferentresultsbutallofwhich
wereperfectlyacceptableaccountingpractices,”andothernearlyidentical
practicesthatwerenonethelessdeemedentirely“unrespectable.”SoTom
Morniniisbynomeansthefirsttocriticizetheprofession.
Weseefourproblemswithmodernaccounting.First,thecurrentregime
reliesuponmanagerstoswearthattheirbooksareinorder.Dozensofhigh-
profilecases—Enron,AIG,LehmanBrothers,WorldCom,Tyco,andToshiba—
showthatmanagementdoesn’talwaysactwithintegrity.Greedtoooftengets
thebestofpeople.Cronyism,corruption,andfalsereportingprecipitate
bankruptcies,joblosses,andmarketcrashes,butalsohighcostsofcapitaland
tighterreinsonequity.
54
Second,humanerrorisaleadingcauseofaccountingmistakes,accordingto
AccountingWEB.OftentheproblemsbeginwhenRandyinfinancefat-fingersa
numberintoaspreadsheetand,likeabutterflyflappingitswings,thesmall
mistakebecomesabigproblemasitfactorsintocalculationsacrossfinancial
statements.
55
Nearly28percentofprofessionalsreportedthatpeopleplugged
incorrectdataintotheirfirm’senterprisesystem.
56
Third,newrulessuchasSarbanes-Oxleyhavedonelittletocurbaccounting
fraud.Ifanything,thegrowingcomplexityofcompanies,moremultifaceted
transactions,andthespeedofmoderncommercecreatenewwaystohide
wrongdoing.
Fourth,traditionalaccountingmethodscannotreconcilenewbusiness
models.Takemicrotransactions.Mostauditsoftwareallowsfortwodecimal
places(i.e.,onepenny),uselessformicrotransactionsofanykind.
Accounting—themeasurement,processing,andcommunicationoffinancial
information—isnottheproblem.Itperformsacriticalfunctionintoday’s
economy.However,theimplementationofaccountingmethodsmustcatchup
withthemodernera.ConsiderthatinPacioli’sday,auditsweredonedaily.
Todaytheyhappenwiththecyclesofthemoonandtheseasons.Nameanother
industrywherefivehundredyearsoftechnologicaladvancementhaveincreased
thetimeittakestocompleteataskby9,000percent.
TheWorldWideLedger
Today,companiesrecordadebitandcreditwitheachtransaction—twoentries,
hencedouble-entryaccounting.TheycouldeasilyaddathirdentrytotheWorld
WideLedger,instantlyaccessibletothosewhoneedtoseeit—thecompany’s
shareholders,auditors,orregulators.Imaginethatwhenamassivecompanylike
Applesellsproducts,buysrawmaterials,paysitsemployees,oraccountsfor
assetsandliabilitiesonitsbalancesheet,theWorldWideLedgerrecordedthe
transactionandpublishedatime-stampedreceipttoablockchain.Thefinancial
reportsforacompanywouldbecomealivingledger—auditable,searchable,and
verifiable.Generatinganyup-to-the-minutefinancialstatementshouldbeas
simpleasaspreadsheetfunction,wheretheclickofabuttongivesyouan
immutable,complete,andsearchablefinancialstatement,freeoferror.
Companiesmightnotwanteveryoneseeingthesenumbers,andsoexecutives
mightgiveonlyregulators,managers,andotherkeystakeholderspermissioned
access.
ManyintheindustryseetheinherentimplicationsofthisWorldWide
Ledgerforaccounting.AccordingtoSimonTaylorofBarclays,suchaledger
couldstreamlinebankcompliancewithregulatorsandreducerisk.“Wedoalot
ofregulatoryreportingwherewe’rebasicallysaying,here’severythingwe’ve
done,becausewhatwe’vedonesitsinsideasystemthatnobodyelsecansee.”
57
AWorldWideLedgerandatransparentrecordofeverything“meansthata
regulatorwouldhaveaccesstothesamebaselayerofdata.Thatwouldmean
lesswork,lesscost,andwecouldbeheldtoaccountinnearrealtime.That’s
reallypowerful.”
58
ForJeremyAllaireofCircle,regulatorsbenefitthemost.
“Bankexaminershavehadtorelyuponopaque,privatelycontrolled,proprietary
ledgersandfinancialaccountingsystemstodotheirwork—the‘booksand
records,’”saidAllaire.“Withasharedpublicledger,auditorsandbank
examinerscouldhaveautomatedformsofexaminationtolookattheunderlying
healthofabalancesheetandthestrengthofacorporation—apowerful
innovationthatcouldautomatemeaningfulpartsofregulationaswellasaudit
andaccounting.”
59
Itbakesintegrityintothesystem.“Allfraudwouldbemuchharder.You
havetodofraudonanongoingbasisandatnopointcanyougobackand
changeyourrecords,”saidChristianLundkvist,ofBalanc3,anEthereum-based
triple-entryaccountingstart-up.
60
AustinHillargued,“Apublicledgerthatis
constantlyauditedandverifiedmeansyoudon’thavetotrustthebooksofyour
partner;thereisintegrityinthestatementsorthetransactionlogs,becausethe
networkitselfisverifyingit.It’slikeacontinuousaprioriauditthatisdone
cryptographically.You’renotrelyingonPricewaterhouseCoopersorDeloitte.
Thereisnocounterpartyrisk.Iftheledgersaysthisistrue,thenit’strue.”
61
Deloitte,oneoftheworld’sBigFouraccountingfirms,hasbeentryingto
understandtheimpactofblockchain.EricPiscini,whoheadsuptheDeloitte
cryptocurrencycenter,tellsclientsthattheblockchainis“abigriskforyourown
businessmodelbecausenowthebusinessofbankingistomanagerisk.If
tomorrowthatriskdisappears,whatareyougoingtodo?”
62
Overripefor
disruptionistheauditbusiness,andauditisathirdofDeloitte’srevenue.
63
Piscinisaid,“That’sadisruptiontoourownbusinessmodel,right?Todaywe
spendalotoftimeauditingcompanies,andwechargefeesaccordingly.
Tomorrow,ifthatprocessiscompletelystreamlinedbecausethereisatime
stampintheblockchain,thatchangesthewayweauditcompanies.”
64
Or
perhapseliminatestheauditfirmaltogether?
DeloittehasdevelopedasolutioncalledPermaRec(forPermanentRecord)
whereby“Deloittewouldrecordthosetransactionsintotheblockchainand
wouldthenbeabletoauditoneofthetwopartners,orbothofthem,very
quickly,becausethattransactionisrecorded.”
65
Butifthethirdentryonthe
blockchain—time-stampedandreadyforalltosee—happensautomatically,
anyone,anywhere,coulddeterminewhetherthebooksbalanced.Conversely,the
fastestareaofgrowthforDeloitteandtheotherbigthreeauditfirmsis
consultingservices.Manyclientsarealreadyscratchingtheirheadsoverthe
blockchain.Thisbewildermentprovidesopportunitiesformigrationupthe
advisoryvaluechain.
Mornini,apluckyentrepreneurandself-described“eternaloptimist,”likened
periodicaccountingto“watchingapersonstandupanddanceinfrontofastrobe
light.Youknowthey’redancing,butyoucan’tquitefigureoutwhat’sgoingon.
Anditlooksinteresting,butit’shardtofigureoutallthestepsinbetween.”
66
Periodicaccountinggivesasnapshot.Auditis,bydefinition,abackward-
lookingprocess.Creatingacompletepictureofacompany’sfinancialhealthby
lookingatperiodicfinancialstatementsisliketurningahamburgerintoacow.
AccordingtoMornini,mostlargecorporationswouldneverwanta
completelytransparentaccountingrecordinthepublicdomainorevenreadily
accessiblebypeoplewithspecialprivileges,suchasauditorsorregulators.A
company’sfinancialsareoneofitsmostguardedsecrets.Furthermore,many
companieswanttoensurethatmanagementhasacertaindegreeofflexibilityin
howitaccountsforcertainitems,suchashowtorecognizerevenue,depreciate
anasset,oraccountforagoodwillcharge.
ButMorninibelievesthatcompanieswouldbenefitfromgreater
transparency—notonlyintermsofstreamliningtheirfinancedepartmentor
loweringthecostofaudit,butinhowthemarketvaluestheircompany.Hesaid,
“Thefirstpubliccompanywiththissysteminplacewillseeasignificantprice
pershareadvantage,orpricetoearningsratioadvantage,overothercompanies
whereinvestorshavetoanxiouslyawaitthedribbleoffinancialinformationthat
theyareprovidedquarterly.”Afterall,heargues,“Whoisgoingtoinvestina
companythatshowsyouwhat’sgoingonquarterly,comparedtoonethatshows
youwhat’sgoingonallthetime?”
67
Willinvestorsdemandtriple-entryaccountingtomeetcorporategovernance
standards?It’snotafar-fetchedquestion.Manyinstitutionalinvestors,suchas
theCaliforniaPublicEmployees’RetirementSystem,havedevelopedstrict
corporategovernancestandards,andwillnotinvestinacompanyunlessthose
standardsaremet.
68
Triple-entryaccountingcouldbenext.
Triple-EntryAccounting:PrivacyIsforIndividuals,NotCorporations
Triple-entryaccountingisnotwithoutskeptics.IzabellaKaminska,aFinancial
Timesreporter,believesmandatingtriple-entryaccountingwillleadtoan
increasingnumberoftransactionsmovingoffbalancesheets.“Therewillalways
bethosewhorefusetofollowtheprotocol,whoabscondandhidesecretvaluein
paralleloff-gridnetworks,whatwecalltheblackmarket,offbalancesheet,
shadowbanking.”
69
Howdoesonereconcilenon-transaction-basedaccountingmeasures,
particularlytherecognitionofintangibleassets?Howarewegoingtotrack
intellectualpropertyrights,brandvalue,orevencelebritystatus—thinkTom
Hanks?HowmanybadfilmsmustthisOscarwinnermakebeforetheblockchain
impairstheHanksbrandvalue?
Theargumentfortriple-entryaccountingisnotagainsttraditional
accounting.Therewillalwaysbeareaswherewewillneedcompetentauditors.
Butiftriple-entryaccountingcanvastlyincreasetransparencyand
responsivenessthroughreal-timeaccruals,verifiabletransactionrecords,and
instantaudit,thentheblockchaincouldsolvemanyofaccounting’sbiggest
problems.Deloittewillneedsomeonetoassessinrealtimethevalueof
intangiblesandperformtheotheraccountingfunctionsthattheblockchain
cannot,ratherthanalargetaskforceofauditors.
Finally,isanimmutablerecordofeverythingtrulydesirable?InEurope,
courtsareupholdingthe“righttobeforgotten,”enforcingpeople’spetitionsto
removetheirhistoryfromtheInternet.Shouldn’tthesameprincipleapplyto
corporations?No.WhydoUberdriversgetratedoncustomersatisfactionbut
corporateexecutivesgetapass?Imagineamechanism—let’scallitatrustapp—
torecordfeedbackinapublicledgerandmaintainanindependent,searchable
scoreforcorporateintegrity.Insidetheblackboxofcorporations,sunshineisthe
bestdisinfectant.
Triple-entryaccountingisthefirstofmanyblockchaininnovationsin
corporategovernance.Likemanyinstitutionsinsociety,ourcorporationsare
sufferingfromacrisisoflegitimacy.ShareholderactivistRobertMonkswrote,
“Capitalismhasbecomeakleptocracy,runbyandfortheenrichmentofCEOs,
orwhatItermmanager-kings.”
70
Theblockchainreturnspowertoshareholders.Imaginethatatoken
representingaclaimonanasset,a“bitshare,”couldcomewithavoteormany
votes,eachcoloredtoaparticularcorporatedecision.Peoplecouldvotetheir
proxiesinstantlyfromanywhere,therebymakingthevotingprocessformajor
corporateactionsmoreresponsive,moreinclusive,andlesssubjectto
manipulation.Decisionswithincompanieswouldrequirerealconsensus,
multiplesignaturesonanindustrialscale,whereeachshareholderheldakeyto
thecompany’sfuture.Oncethevotesarein,thedecisionaswellastheboard
meetingminuteswouldbetime-stampedandrecordedinanimmutableledger.
Shouldn’tcorporationshavearighttochangetheirhistory,tobeforgotten?
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No.Asartifactsofsociety,companieshaveresponsibilitiesthataccompanytheir
licensetooperate.Indeed,corporationshaveanobligationtosocietytopublish
anyandallinformationabouttheirdealings.Sure,corporationshavearightand
obligationtoprotecttradesecretsandtheprivacyoftheiremployees,staff,and
otherstakeholders.Butthat’sdifferentfromprivacy.Increasingtransparencyisa
hugeopportunityformanagerseverywhere:upholdthehigheststandardsof
corporategovernance,seizethemantleoftrustascorporateleaders,anddoitby
embracingtheblockchain.
REPUTATION:YOUAREYOURCREDITSCORE
Whetheryou’reapplyingforyourfirstcreditcardorseekingaloan,thebank
willvalueonenumberaboveallelse:yourcreditscore.Thisnumberismeantto
reflectyourcreditworthinessandthereforeyourriskofdefault.Itisthe
amalgamationofanumberofinputs,fromhowlongyou’veborrowedtoyour
paymenttrackrecord.Mostretailcreditdependsonit.Butthecalculationis
deeplyflawed.First,itisincrediblynarrow.Ayoungpersonwithnocredit
historymighthaveasterlingreputation,atrackrecordoffulfilling
commitments,orarichaunt.Nonefactorsintoacreditscore.Second,thescore
createsperverseincentivesforindividuals.Increasingly,peopleusedebitcards,
thatis,thecashintheiraccount.Becausetheyhavenocreditscore,theyget
penalized.Yetcreditcardfirmsencourageindividualswithoutresourcestoapply
forcreditcardsanyway.Third,scoresareverylaggy:datainputscanbeoutdated
andhavelittlerelevance.Alatepaymentattheageoftwentyhaslittlebearing
onone’screditriskatfifty.
FICO,anAmericancompanyoriginallycalledFair,IsaacandCompany,
dominatestheU.S.marketforcreditscores,yetitdoesn’tfactormostrelevant
informationintoitsanalysis.MarcAndreessensaid,“PayPalcandoareal-time
creditscoreinmilliseconds,basedonyoureBaypurchasehistory—anditturns
outthat’sabettersourceofinformationthanthestuffusedtogenerateyour
FICOscore.”
72
Thesefactors,combinedwithtransactionandbusinessdataand
otherattributesgeneratedbyblockchaintechnology,canenableafarmore
robustalgorithmforissuingcreditandmanagingrisk.
What’syourreputation?Weallhaveatleastone.Reputationiscriticalto
trustinbusinessandineverydaylife.Todate,financialintermediarieshavenot
usedreputationasthebasisforestablishingtrustbetweenindividualsandbanks.
Considerasmallbusinessownerwhowantstogetaloan.Moreoftenthannot,
theloanofficerwillbasethedecisionontheperson’sdocumentation,aone-point
perspectiveofidentity,andtheircreditscore.Ofcourse,ahumanbeingismore
thanthesumofaSocialSecuritynumber,placeofbirth,primaryresidence,and
credithistory.However,thebankdoesnotknow,anddoesnotcare,whether
you’reareliableemployee,anactivevolunteer,anengagedcitizen,orthecoach
ofyourkid’ssoccerteam.Theloanofficermightappreciateyouractingwith
integrity,butthebank’sscoringsystemdoesnot.Thesecomponentsof
reputationaresimplydifficulttoformulate,document,anduseassocialand
economicsystemsarecurrentlyconstructed.Mostoftheseareetherealand
ephemeral.
Sowhatdothebillionsofpeopledowhohavenoreputationbeyondtheir
immediatesocialcircle?Wherefinancialservicesareavailabletotheglobal
poor,manycan’tmeettherequisiteidentitythresholds,suchasIDcards,proof
ofresidence,orfinancialhistory.Thisisaprobleminthedevelopedworldtoo.
InDecember2015,manylargeU.S.banksrejectedthenewlyformedNewYork
IDcardsasavalidcredentialtoopenabankaccount,despitethefactthatmore
than670,000peoplesignedupforthemandthebanks’federalregulatorshad
approvedtheiruse.
73
Blockchaincouldsolvethisproblembyempowering
peopletoformuniqueidentitieswithavarietyofattributes,previoustransaction
historyamongthem,andgivethemnewalternativesbeyondthetraditional
bankingsystem.
Therearestillmanyusecases—particularlyincredit—wheretheblockchain
establishestrustbetweenpartieswhentrustisneeded.Blockchaintechnology
notonlyworkstoensurethatloanfundsmovetotheborrower,butalsoassures
thattheborrowerrepayswithinterest.Itempowersbothpartieswiththeirown
data,strengthenstheirprivacy,andgeneratesanewkindofpersistenteconomic
identitybasedonfactorssuchasone’spasteconomichistoryontheblockchain
andone’ssocialcapital.PatrickDeegan,CTOatidentitystart-upPersonal
BlackBox,saidthatindividualswillsomeday“deployandmanagetheirown
identity,andformtrustedconnectionswithotherpeersandnodes,”thanksto
blockchaintechnology.
74
Becausetheblockchainrecordsandstoresall
transactionsinanimmutablerecord,everytransactioncancountincrementally
towardreputationandcreditworthiness.Further,individualscandecidewhich
personainteractswithwhichinstitution.Deegansaid,“Icancreatedifferent
personasthatrepresentdifferentsidesofmyself,andIchoosethepersonathat
interactswiththecompany.”
75
Banksandothercompaniesontheblockchain
oughtnotaskforandaggregatemoreinformationthantheyneedtoprovide
service.
Thismodelhasproventowork.BTCjamisapeer-to-peerlendingplatform
thatusesreputationasthebasisforextendingcredit.Userscanlinktheirprofile
onBTCjamtoFacebook,LinkedIn,eBay,orCoinbasetoaddmoredepthand
texture.FriendscanvolunteerrecommendationsfromFacebook.Youcaneven
submityouractualcreditscoreasoneofmanyattributes.Noneofthisprivate
informationisreleased.Usersstartontheplatformwithalowcreditscore.But
youcanquicklybuildareputationbyshowingyouareareliableborrower.The
beststrategyistostartwitha“reputationloan”toproveyou’rereliable.Asa
user,youwillhavetorespondtoinvestorquestionsduringthefundingprocess.
Ignoringthesequestionsisaredflag;thecommunitywillhesitatetofundyou.
Withyourfirstloan,startwithamanageableamount,andpayitbackontime.
Onceyouhave,yourquantitativescorewillimprove,andothermembersinthe
communitymightgiveyouapositivereview.AsofSeptember2015,BTCjam
hadfundedeighteenthousandloansinexcessof$14million.
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EntrepreneurErikVoorheescalledforcommonsense:“Withareputation-
basedsystem,peoplewhoaremorelikelytobeabletoaffordahouseshouldbe
abletopurchaseonemoreeasily.Thosewhoarelesslikelyshouldhaveaharder
timegettingaloan.”Tohim,thismethod“willdrivedowncostsforgoodactors
anddriveupcostsforourbadactors,whichistheproperincentive.”
77
In
reputationsystems,yourcreditworthinessisderivednotfromaFICOscore,but
fromanamalgamationofattributesthatformyouridentityandinformyour
abilitytorepayaloan.Creditratingsforcompanieswillalsochangetoreflect
newinformationandinsightmadepossiblebyblockchain.Imaginetoolsthatcan
aggregatereputationandtrackdifferentreputationalaspects,suchasfinancial
trustworthiness,vocationalcompetence,andsocialconsciousness.Imagine
gettingcreditbasedonsharedvalues,wherethepeopleloaningyoumoney
appreciateyourroleinthecommunityandyourgoals.
THEBLOCKCHAINIPO
TheweekofAugust17,2015,wasanuglyone:TheChinesestockmarket
crashed,theS&P500haditsworstperformanceinfouryears,andfinancial
punditseverywhereweretalkingaboutanotherglobaleconomicslowdownand
possiblecrisis.TraditionalIPOswerepulledfromthemarket,mergerswere
stalled,andSiliconValleywasgettingantsyabouttheoverinflatedvaluationof
itscherishedunicorns,privatecompaniesvaluedatmorethan$1billion.
Amidthecarnage,anenterprisecalledAugurlaunchedoneofthemost
successfulcrowdfundingcampaignsinhistory.Inthefirstweek,morethan
3,500peoplefromtheUnitedStates,China,Japan,France,Germany,Spain,the
UnitedKingdom,Korea,Brazil,SouthAfrica,Kenya,andUgandacontributeda
totalof$4million.Therewasnobrokerage,noinvestmentbank,nostock
exchange,nomandatoryfilings,noregulator,andnolawyers.Therewasn’teven
aKickstarterorIndiegogo.Ladiesandgentlemen,welcometotheblockchain
IPO.
Matchinginvestorswithentrepreneursisoneoftheeightfunctionsofthe
financialservicesindustrymostlikelytobedisrupted.Theprocessofraising
equitycapital—throughprivateplacements,initialpublicofferings,secondary
offerings,andprivateinvestmentsinpublicequities(PIPEs)—hasnotchanged
significantlysincethe1930s.
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Thankstonewcrowdfundingplatforms,smallcompaniescanaccesscapital
usingtheInternet.TheOculusRiftandthePebbleWatchwereearlysuccessesof
thismodel.Still,participantscouldn’tbuyequitydirectly.Today,theU.S.
JumpstartOurBusinessStartupsActallowssmallinvestorstomakedirect
investmentsincrowdfundingcampaigns,butinvestorsandentrepreneursstill
needintermediariessuchasKickstarterorIndiegogo,andaconventional
paymentmethod,typicallycreditcardsandPayPal,toparticipate.The
intermediaryistheultimatearbiterofeverything,includingwhoownswhat.
TheblockchainIPOtakestheconceptfurther.Now,companiescanraise
funds“ontheblockchain”byissuingtokens,orcryptosecurities,ofsomevalue
inthecompany.Theycanrepresentequity,bonds,or,inthecaseofAugur,
market-makerseatsontheplatform,grantingownerstherighttodecidewhich
predictionmarketsthecompanywillopen.Ethereumwasanevengreater
successthanAugur,fundingthedevelopmentofawholenewblockchain
throughacrowdsaleofitsnativetoken,ether.TodayEthereumisthesecond-
longestandfastest-growingpublicblockchain.Theaverageinvestmentinthe
Augurcrowdfundingwas$750,butonecaneasilyimagineminimum
subscriptionsofadollaroreventencents.Anyoneintheworld—eventhe
poorestandmostremotepeople—couldbecomestockmarketinvestors.
Overstock,thee-retailer,islaunchingperhapsthemostambitious
cryptosecurityinitiativeyet.Overstock’sforward-thinkingfounder,Patrick
Byrne,believesblockchain“candoforthecapitalmarketswhattheInternethas
doneforconsumers.”Theproject,dubbedMedici,enablescompaniestoissue
securitiesontheblockchainandrecentlyreceivedthesupportoftheSecurities
andExchangeCommission.
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Thecompanybeganissuingitsfirstblockchain-
basedsecurities,suchasthe$5millioncryptobondforanaffiliateofFNY
Capital,in2015.
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Overstockclaimsmanyfinancialservicesfirmsandother
companiesarelininguptousetheplatform.Surely,thetacitapprovaloftheSEC
willgiveOverstockaheadstartonwhatissuretobealongjourney.
ShouldblockchainIPOscontinuetogaintraction,theywillultimately
disruptmanyoftherolesintheglobalfinancialsystem—brokers,investment
bankers,andsecuritieslawyers—andchangethenatureofinvestment.By
integratingblockchainIPOswithnewplatformsforvalueexchangesuchas
Circle,Coinbase(themostwell-fundedbitcoinexchangestart-up),Smartwallet
(aglobalassetexchangeforallformsofvalue),andotheremergingcompanies,
weexpectadistributedvirtualexchangetoemerge.Theoldguardistaking
notice.TheNYSEinvestedinCoinbaseandNASDAQisintegratingblockchain
technologyintoitsprivatemarket.BobGreifeld,CEOofNASDAQ,isstarting
small,usingblockchainto“streamlinefinancialrecordkeepingwhilemakingit
cheaperandmoreaccurate,”
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butevidentlyNASDAQandotherincumbents
havebiggerplans.
THEMARKETFORPREDICTIONMARKETS
Augurisbuildingadecentralizedpredictionmarketplatformthatrewardsusers
forcorrectlypredictingfutureevents—sportingevents,electionresults,new
productlaunches,thegendersofcelebritybabies.Howdoesitwork?Augur
userscanpurchaseorsellsharesintheoutcomeofafutureevent,thevalueof
whichisanestimateoftheprobabilityofaneventhappening.Soifthereare
evenodds(i.e.,50/50),thecostofbuyingasharewouldbefiftycents.
Augurrelieson“thewisdomofthecrowd,”thescientificprinciplethata
largegroupofpeoplecanoftenpredicttheoutcomeofafutureeventwithfar
greateraccuracythanoneormoreexperts.
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Inotherwords,Augurbringsthe
spiritofthemarkettobearontheaccuracyofpredictions.Therehavebeenafew
attemptsatcentralizedpredictionmarkets,suchastheHollywoodStock
Exchange,Intrade,andHedgeStreet(nowNadex),butmosthavebeenshut
downorfailedtolaunchoverregulatoryandlegalconcerns.Thinkassassination
contractsandterrorismfutures.
Usingblockchaintechnologymakesthesystemmoreresilienttofailure,
moreaccurate,andmoreresistanttocrackdowns,error,coercion,liquidity
concerns,andwhattheAugurteamcallseuphemistically“datedjurisdictional
regulation.”ThearbitersontheAugurplatformareknownasrefereesandtheir
legitimacyderivesfromtheirreputationpoints.Fordoingtherightthing—that
is,correctlystatingthataneventhappened,whowonasportingmatch,orwho
wonanelection—theyreceivemorereputationpoints.Maintainingtheintegrity
ofthesystemhasothermonetarybenefits:themorereputationpointsyouhave,
themoremarketsyoucanmake,andthusthemorefeesyoucancharge.In
Augurswords,“ourpredictionmarketseliminatecounterpartyrisks,centralized
servers,andcreateaglobalmarketbyemployingcryptocurrenciesincluding
bitcoin,ether,andstablecryptocurrencies.Allfundsarestoredinsmart
contracts,andnoonecanstealthemoney.”
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Augurresolvestheissueof
unethicalcontractsbyhavingazero-tolerancepolicyforcrime.
ToAugursleadershipteam,humanimaginationistheonlypracticallimitto
theutilityofpredictionmarkets.OnAugur,anyonecanpostaclearlydefined
predictionaboutanythingwithaclearenddate—fromthetrivial,“WillBradPitt
andAngelinaJoliedivorce?”tothevital,“WilltheEuropeanUniondissolveby
June1,2017?”Theimplicationsforthefinancialservicesindustry,forinvestors,
economicactors,andentiremarkets,arehuge.ConsiderthefarmerinNicaragua
orKenyawhohasnorobusttoolstohedgeagainstcurrencyrisk,politicalrisk,
orchangestotheweatherandclimate.Accessingpredictionmarketswould
allowthatpersontomitigatetheriskofdroughtordisaster.Forexample,he
couldbuyapredictioncontractthatpaysoutifacropyieldisbelowacertain
level,orifthecountrygetslessthanapredeterminedamountofrain.
Predictionmarketsareusefulforinvestorswhowanttoplacebetsonthe
outcomeofspecificeventssuchas“WillIBMbeatitsearningsbyatleastten
centsthisquarter?”Todaythereported“estimate”forcorporateearningsis
nothingmorethanthemeanormedianofafewso-calledexpertanalysts.By
harnessingthewisdomofthecrowds,wecanformmorerealisticpredictionsof
thefuture,leadingtomoreefficientmarkets.Predictionmarketscanserveasa
hedgeagainstglobaluncertaintyand“blackswan”events:“WillGreece’s
economyshrinkbymorethan15percentthisyear?”
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Today,werelyonafew
talkingheadstosoundthealarms;apredictionmarketwouldactmore
impartiallyasanearlywarningsystemforinvestorsglobally.
Predictionmarketscouldcomplementandultimatelytransformmany
aspectsofthefinancialsystem.Considerpredictionmarketsontheoutcomesof
corporateactions—earningsreports,mergers,acquisitions,andchangesin
management.Predictionmarketswouldinformtheinsuranceofvalueandthe
hedgingofrisk,potentiallyevendisplacingesotericfinancialinstrumentslike
options,interestrateswapsandcreditdefaultswaps.
Ofcourse,noteverythingneedsapredictionmarket.Enoughpeopleneedto
caretomakeitliquidenoughtoattractattention.Still,thepotentialisvast,the
opportunitysignificant,andaccessavailabletoall.
ROADMAPFORTHEGOLDENEIGHT
Blockchaintechnologieswillimpacteveryformandfunctionofthefinancial
servicesindustry—fromretailbankingandcapitalmarketstoaccountingand
regulation.Theywillalsoforceustorethinktheroleofbanksandfinancial
institutionsinsociety.“Bitcoincannothavebail-ins,bankholidays,currency
controls,balancefreezes,withdrawallimits,bankinghours,”
85
saidAndreas
Antonopoulos.
Whereastheoldworldwashierarchical,slow-moving,reluctanttochange,
closedandopaque,andcontrolledbypowerfulintermediaries,theneworder
willbeflatter,offeringapeer-to-peersolution;moreprivateandsecure;
transparent,inclusive,andinnovative.Tobesure,therewillbedislocationand
disruption,butthereisalsoaremarkableopportunityfortheindustry’sleadersto
dosomethingaboutittoday.Thefinancialservicesindustrywillbothshrinkand
growoverthecomingyears;fewerintermediarieswillbeabletooffermore
productsandservicesatamuchlowercosttoamuchlargerpopulation.That’sa
goodthing.Whetherpermissionedandclosedblockchainswillfindaplaceina
decentralizedworldisupfordebate.BarrySilbert,whofoundedSecondMarket
andisnowCEOoftheDigitalCurrencyGroup,said,“Ihaveaverycynical
viewoftheobjectivitiesputforwardbylargefinancialincumbents.Whenall
youhaveisahammer,everythinglookslikeanail.”
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Webelievethatthe
unstoppableforceofblockchaintechnologyisbarrelingdownontheentrenched,
regulated,andossifiedinfrastructureofmodernfinance.
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Theircollisionwill
reshapethelandscapeoffinancefordecadestocome.Wewouldlikeittofinally
transformfromanindustrialagemoneymachineintoaprosperityplatform.
J
CHAPTER4
RE-ARCHITECTINGTHEFIRM:
THECOREANDTHEEDGES
BUILDINGCONSENSYS
uly30,2015,wasabigdayforaglobalgroupofcoders,investors,
entrepreneurs,andcorporatestrategistswhothinkthatEthereumisthenext
bigthing—notjustforbusiness,butpossiblyforcivilization.Ethereum,the
blockchainplatformeighteenmonthsinthemaking,wentlive.
WewitnessedthelaunchfirsthandintheBrooklynofficeofConsensus
Systems(ConsenSys),oneofthefirstEthereumsoftwaredevelopment
companies.Around11:45a.m.,therewerehighfivesallaroundastheEthereum
networkcreatedits“genesisblock,”afterwhichafrenzyofminersracedtowin
thefirstblockofether,Ethereum’scurrency.Thedaywaseerilysuspenseful.A
massivethunderstormbrokeovertheEastRiver,triggeringloudandrandom
emergencyfloodwarningsoneveryone’ssmartphones.
AccordingtoitsWebsite,Ethereumisaplatformthatrunsdecentralized
applications,namelysmartcontracts,“exactlyasprogrammedwithoutany
possibilityofdowntime,censorship,fraud,orthirdpartyinterference.”
Ethereumislikebitcoininthatitsethermotivatesanetworkofpeerstovalidate
transactions,securethenetwork,andachieveconsensusaboutwhatexistsand
whathasoccurred.Butunlikebitcoinitcontainssomepowerfultoolstohelp
developersandotherscreatesoftwareservicesrangingfromdecentralizedgames
tostockexchanges.
Ethereumwasconceivedin2013bythen-nineteen-year-oldVitalikButerin,
aCanadianofRussiandescent.Hehadarguedtothebitcoincoredevelopersthat
theplatformneededamorerobustscriptinglanguagefordeveloping
applications.Whentheyrejectedhim,hedecidedtocrafthisownplatform.
ConsenSyswasfirstofftheblock,sotospeak,launchedtocreateEthereum-
basedapps.Flash-forwardacoupleofyearsandtheanalogyisclear:Linus
TorvaldsistoLinuxwhatVitalikButerinistoEthereum.
WhendiscussingtheriseofblockchainandEthereumtechnology,Joseph
Lubin,ConsenSys’scofounder,said,“Itbecamecleartomethatinsteadof
peoplewastingtheirtimewalkingdownthestreetwithpostersonsticks,we
couldallworktogethertojustbuildthenewsolutionstothisbrokeneconomy
andsociety.”
1
Don’toccupyWallStreet.Inventourownstreet.
Likemanyentrepreneurs,Lubinhasaboldmission,notjusttobuildagreat
companybuttosolveimportantproblemsintheworld.Hedeadpansthatthe
companyisa“blockchainventureproductionstudio,buildingdecentralized
applications,mostlyonEthereum.”Prettylow-key.But,ifimplemented,the
applicationsthatConsenSysisbuildingwouldshakethewindowsandrattlethe
wallsofadozenindustries.Projectsincludeadistributedtriple-entryaccounting
system;adecentralizedversionofthemassivelypopularRedditdiscussion
forum,plaguedoflatebycontroversyoveritscentralizedcontrol;adocument
formationandmanagementsystemforself-enforcingcontracts(akasmart
contracts);predictionmarketsforbusiness,sports,andentertainment;anopen
energymarket;adistributedmusicmodeltocompetewithAppleandSpotify,
thoughthosetwofirmscoulduseittoo;
2
andasuiteofbusinesstoolsformass
collaboration,masscreation,andmassmanagementofamanagement-less
company.
OurstoryofConsenSysisnotsomuchaboutitsambitiousblockchain-based
productsorservices.It’saboutitseffortstocultivateacompanyofitsown,
pioneeringimportantnewgroundinmanagementsciencealongthelinesof
holacracy,acollaborativeratherthanhierarchicalprocessfordefiningand
aligningtheworktobedone.“WhileIdon’twantustoimplementholacracyas
is—itfeelswaytoorigidandstructuredtome—weareworkingtoincorporate
manyofitsphilosophiesinourstructureandprocesses,”saidLubin.Among
thoseholacratictenetsare“dynamicrolesratherthantraditionaljobdescriptions;
distributed,notdelegatedauthority;transparentrulesratherthanofficepolitics;
andrapidreiterationsratherthanbigreorganizations,”allofwhichdescribehow
blockchaintechnologieswork.HowConsenSysisstructured,howitcreates
value,andhowitmanagesitselfdiffersnotonlyfromtheindustrialcorporation
butalsofromthetypicaldot-com.
JoeLubinisnotanideologue,andcertainlynotananarchistorlibertarianas
someinthecryptocurrencymovementare.Buthedoesthinkthatweneedto
changecapitalismifwewantittosurvive,specificallytomoveawayfromthe
command-and-controlhierarchiesinappropriateforanetworkedworld.Henotes
thattoday,eventhoughvastnetworksenmeshtheworldandenableusallto
communicateinexpensively,richly,andimmediately,hierarchiesprevail.
Blockchaintechnologyisthecountervalence:“Globalhumansocietycannow
agreeonthetruthandmakedecisionsintenminutes,ortenseconds.Thissurely
createsanopportunitytohaveamoreenfranchisedsociety,”hesaid.Thegreater
theengagement,thegreatertheprosperity.
TheEndofManagers.LongLiveManagement
ConsenSysoperatesaccordingtoaplanthatallemployees(“members”)
developed,modified,votedon,andadopted.JoeLubindescribesitsstructureas
a“hub”ratherthanahierarchy,andeachofitsprojectsisa“spoke”inwhich
majorcontributorsholdequity.
Forthemostpart,membersofConsenSyschoosewhattheyworkon.No
top-downassignments.Lubinsaid,“Weshareasmuchaspossible,including
sharedsoftwarecomponents.Webuildsmallagileteamsbutthereis
collaborationamongthem.Wehavetonsofimmediate,open,rich
communication.”Memberschoosetoworkontwotofiveprojects.When
someoneseesapieceofworkthatneedstogetdone,heorshejumpsinand
pushesitalittleoralotfartherinavaluabledirection,asappropriateforher
role.“Wetalkaboutthingsquiteabitsopeopleareawareofthemanythings
thatcouldbepushedforward,”hesaid.Butthesemanythingscananddochange
constantly.“Partofbeingagilemeansthatprioritiesaredynamic.”
Lubinisnottheboss.Hismainoperationalroleisadvisory:“Inmanycases,
individualsaskmeorotherswhatwouldbegoodtoworkon,”hesaid.Through
Slack
3
andGitHub,
4
hesuggestsdirectionstheymightpursue“tobuildallthe
servicesandplatformsthatwewanttobuild,andmanythatwewanttobuildbut
don’tknowityet.”
Memberownershipexplicitlyincentivizesthisbehavior.Everyoneownsa
pieceofeveryprojectdirectlyorindirectly:theEthereumplatformissuestokens
thatmemberscanexchangeforetherandthenconvertintoanyothercurrency.
“Ourgoalistoachieveanicebalancebetweenindependenceand
interdependence,”Lubinsaid.“Weviewourselvesasacollectiveofclosely
collaboratingentrepreneurlikeagents.Atsomepoint,itmayprovenecessaryto
suggestthatacertainthingreallyneedstogetdoneandifnobodystepsup,to
hiresomeoneinitiallyforthatroleorincentivizeinternalpeopletodoit,”said
Lubin.But,overall,“everyoneisaself-managedadult.DidImentionwe
communicatealot?Thenweallmakeourowndecisions.”
Thewatchwordsareagility,openness,andconsensus:identifytheworkto
bedone,distributetheloadamongthepeopleeagerandabletodoit,agreeon
theirroles,responsibilities,andcompensation,andthencodifytheserightsin
“explicit,detailed,unambiguous,self-enforcingagreementsthatcanserveasthe
gluetoholdallofthebusinessaspectsofourrelationshipstogether,”hesaid.
Someagreementspayforperformance,othersmeteoutannualsalaryinether,
andstillothersaremorelike“requestsforparticipation”withbountiesattached
totaskcompletionsuchaswritingalineofcode.Ifthecodepassesthetest,then
thebountyisautomaticallyreleased.“Everythingcanbesurfacedand
appropriatelytransparent.Incentivesareexplicitandgranular,”hesaid.“This
leavesusfreetocommunicate,becreative,andadaptbasedonthese
expectations.”
Darewecointheneologismblockcom,acompanyformedandfunctioning
onblockchaintechnologies?That’sthegoal,torunasmuchofConsenSysas
possibleonEthereum,fromgovernanceandday-to-dayoperationstoproject
management,softwaredevelopmentandtesting,hiringandoutsourcing,
compensation,andfunding.Theblockchainalsoenablesreputationsystems
wherememberscanrateoneanothersperformanceascollaborators,thereby
syndicatingtrustinthecommunity.Lubinsaid,“Persistentdigitalidentityor
personaandreputationsystemswillkeepusmorehonestandwellbehaved
towardoneanother.”
Thesecapabilitiesblurtheboundariesofacompany.Therearenodefault
settingsforincorporation.MembersoftheConsenSysecosystemcanform
spokesbyreachingconsensusonstrategy,architecture,capital,performance,and
governance.Theymaydecidetolaunchacompanythatcompeteswithinan
existingmarketorprovidesaninfrastructureforanewmarket.Onceitis
launched,theycanadjustthosesettings.
DecentralizingtheEnterprise
Theblockchainwillreducefrictionforcompanieseverywhere.“Lowerfriction
meanslowercostsasthepriceofvaluableintermediationisdeterminedviathe
mostefficientpricediscoverymechanism:decentralizedfreemarkets.Nolonger
willincumbentsbeabletoleveragelegal,regulatory,informational,andpower
asymmetriestoextractfarmorevaluefromatransactionintheirroleas
intermediarythantheyaddtoit,”Lubinsaid.
CouldConsenSysbuildsomekindoftrulydecentralizedautonomous
organizationownedandcontrolledbyitsnonhumanvaluecreators,governed
throughsmartcontractsratherthanhumanagency?“Alltheway!”saidLubin.
“Massiveintelligenceonadecentralizedglobalcomputationalsubstrate,an
underlyinglayer,shouldchangethearchitectureofthefirmfromalarge
collectionofspecializeddepartmentsrunbyhumanstosoftwareagentsthatcan
cooperateandcompeteinfreemarkets.”Someagentswillorganizeforlonger
periodsoftimetoserveongoingcustomerneeds,suchasutilityand
maintenance.Otherswillswarmaroundashort-termproblem,solveit,and
dissolvejustasquickly,havingservedtheirpurpose.
Isthereariskthatradicaldecentralizationandautomationremoveshuman
agencyindecisionmaking(e.g.,theriskofroguealgorithms)?“Iamnot
concernedaboutmachineintelligence.Wewillevolvewithitandforalongtime
itwillbeintheserviceof,oranaspectof,Homosapienscybernetica.Itmay
evolvebeyondusbutthatisfine,”Lubinsaid.“Ifso,itwilloccupyadifferent
ecologicalniche.Itwilloperateatdifferentspeedsanddifferentrelevanttime
scales.Inthatcontext,artificialintelligencewillnotdistinguishbetween
humans,arock,orageologicalprocess.Weevolvedpastlotsofspecies,many
ofwhicharedoingfine(intheirpresentforms).”
ConsenSysisstillatinycompany.Itsgrandexperimentmayormaynot
succeed.Butitsstoryprovidesaglimpseintoradicalchangesincorporate
architecturethatmayhelpunleashinnovationandharnessthepowerofhuman
capitalfornotjustwealthcreationbutprosperity.Blockchaintechnologyis
enablingnewformsofeconomicorganizationandnewportfoliosofvalue.There
aredistributedmodelsofthefirmemerging—ownership,structure,operations,
rewards,andgovernance—thatgofarbeyondenhancinginnovation,employee
motivation,andcollectiveaction.Theymaybethelong-awaitedpreconditionfor
amoreprosperousandinclusiveeconomy.
Businessleadershaveanotheropportunitytorethinkhowtheyorganize
valuecreation.Theycouldnegotiate,contract,andenforcetheiragreementson
theblockchain;dealseamlesslywithsuppliers,customers,employees,
contractors,andautonomousagents;andmaintainafleetoftheseagentsfor
otherstouse,andtheseagentscouldrentoutorlicenseanyexcesscapacityin
theirvaluechain.
CHANGINGTHEBOUNDARIESOFTHEFIRM
ThroughoutthefirsteraoftheInternet,managementthinkers(Donincluded)
talkedupthenetworkedenterprise,theflatcorporation,openinnovation,and
businessecosystemsassuccessorstothehierarchiesofindustrialpower.
However,thearchitectureoftheearly-twentieth-centurycorporationremains
prettymuchintact.Eventhebigdot-comsadoptedatop-downstructurewith
suchdecisionmakersasJeffBezos,MarissaMayer,andMarkZuckerberg.So
whywouldanyestablishedfirm—particularlyonesthatmaketheirmoneyoff
otherpeople’sdata,operatelargelybehindcloseddoors,andsuffersurprisingly
littleindatabreachafterdatabreach—wanttoleverageblockchaintechnologies
todistributepower,increasetransparency,respectuserprivacyandanonymity,
andincludefarmorepeoplewhocanaffordfarlessthanthosealreadyserved?
TransactionCostsandtheStructureoftheFirm
Let’sstartwithalittleeconomics.In1995,DonusedNobelPrize–winning
economistRonaldCoase’stheoryofthefirmtoexplainhowtheInternetwould
affectthearchitectureofthecorporation.Inhis1937paper“TheNatureofthe
Firm,”Coaseidentifiedthreetypesofcostsintheeconomy:thecostsofsearch
(findingalltherightinformation,people,resourcestocreatesomething);
coordination(gettingallthesepeopletoworktogetherefficiently);and
contracting(negotiatingthecostsforlaborandmaterialsforeveryactivityin
production,keepingtradesecrets,andpolicingandenforcingtheseagreements).
Hepositedthatafirmwouldexpanduntilthecostofperformingatransaction
insidethefirmexceededthecostofperformingthetransactionoutsidethefirm.
5
DonarguedthattheInternetwouldreduceafirm’sinternaltransactioncosts
somewhat;butwethought,becauseofitsglobalaccessibility,itwouldreduce
costsintheoveralleconomyevenmore,inturnloweringbarrierstoentryfor
morepeople.Yes,itdiddropsearchcosts,throughbrowsersandtheWorldWide
Web.Italsodroppedcoordinationcoststhroughe-mail,dataprocessing
applicationslikeERP,socialnetworks,andcloudcomputing.Manycompanies
benefitedfromoutsourcingsuchunitsascustomerserviceandaccounting.
Marketersengagedcustomersdirectly,eventurningconsumersintoproducers
(prosumers).Productplannerscrowdsourcedinnovations.Manufacturers
leveragedvastsupplynetworks.
However,thesurprisingrealityisthattheInternethashadperipheralimpact
oncorporatearchitecture.Theindustrial-agehierarchyisprettymuchintactas
therecognizablefoundationofcapitalism.Sure,thenetworkshaveenabled
companiestooutsourcetolow-costgeographies.ButtheInternetdropped
transactioncostsinsidethefirmaswell.
FromHierarchytoMonopoly
Socompaniestodayremainhierarchies,andmostactivitiesoccurwithin
corporateboundaries.Managersstillviewthemasabettermodelfororganizing
talentandintangibleassetssuchasbrands,intellectualproperty,knowledge,and
culture,aswellasformotivatingpeople.Corporateboardsstillcompensate
executivesandCEOsfarbeyondanyreasonablemeasureofthevaluethey
create.Notincidentally,theindustrialcomplexcontinuestogeneratewealth,but
notprosperity.Infact,aswehavepointedout,thereisstrongevidenceofa
growingconcentrationofpowerandwealthinconglomeratesandeven
monopolies.
AnotherNobellaureate,OliverWilliamson,predictedasmuch,
6
andpointed
outthenegativeeffectsonproductivity:“Sufficeittoobserveherethatthemove
fromautonomoussupply(bythecollectionofsmallfirms)tounifiedownership
(inonelargefirm)isunavoidablyattendedbychangesinbothincentiveintensity
(incentivesareweakerintheintegratedfirm)andadministrativecontrols
(controlsaremoreextensive).”
7
PeterThiel,cofounderofPayPal,wrotein
praiseofmonopoliesinhisenormouslyreadableandequallycontroversialbook,
ZerotoOne.ARandPaulsupporter,Thielsaid,“Competitionisforlosers....
Creativemonopoliesaren’tjustgoodfortherestofsociety;they’repowerful
enginesformakingitbetter.”
8
WhileThielmightberightaboutstrivingtodominateone’sindustryor
market,heprovidednorealevidencethatmonopoliesaregoodforconsumersor
societyasawhole.Tothecontrary,theentirebodyofcompetitionlawinmost
democraticcapitalistcountriesderivesfromacontrarynotion.Theideaoffair
competitiondatesbacktoRomantimes,withthedeathpenaltyforsome
violations.
9
Whenfirmshavenorealcompetition,theycangrowasinefficientas
theywant,raisingpricesinandoutsidethefirm.Lookatgovernments.Evenin
thetechnologyindustry,manyarguethatmonopoliesmayhelpwithinnovation
intheshorttermbutmayharmsocietyinthelongterm.Companiesmayamass
monopolypowerthroughcoolproductsandservicesthatcustomerslove,butthe
honeymooneventuallyends.It’snotsomuchthattheirinnovationsnolonger
delight;it’sthatthecompaniesthemselvesbegintoossify.
Mostthinkersunderstandthatinnovationtypicallycomesfromtheedgeof
thefirm,notfromitscore.HarvardUniversitylawprofessorYochaiBenkler
agrees:“MonopoliesmayhavelotsofmoneytoinvestinR&Dbuttypicallynot
theinternalcultureofpureandopenexplorationthatisrequiredforinnovation.
TheWebdidn’tcomefrommonopolies;itcamefromtheedge.Googledidnot
comefromMicrosoft.TwitterdidnotcomefromAT&T,orforthatmattereven
fromFacebook.”
10
Inmonopolies,layersofbureaucracydistancetheexecutives
atthetopfrommarketsignalsandemergenttechnologyattheedges,where
companiesbumpupagainstoneanotherandothermarkets,otherindustries,
othergeographies,otherintellectualdisciplines,othergenerations.Accordingto
JohnHagelandJohnSeelyBrown,“Theperipheryoftoday’sglobalbusiness
environmentiswhereinnovationpotentialisthehighest.Ignoreitatyour
peril.”
11
Executivesshouldbeexcitedaboutblockchaintechnology,becausethewave
ofinnovationcomingfromtheedgemaywellbeunprecedented.Fromthemajor
cryptocurrencies—Bitcoin,BlackCoin,Dash,Nxt,andRipple—tothemajor
blockchainplatforms—Lighthouseforpeer-to-peercrowdfunding,Factomasa
distributedregistry,Gemsfordecentralizedmessaging,MaidSafefor
decentralizedapplications,Storjforadistributedcloud,andTezosfor
decentralizedvotingtonameafew—thenexteraoftheInternethasrealvalue
attachedtoitandrealincentivestoparticipate.Theseplatformsholdpromisefor
protectinguseridentity,respectinguserprivacyandotherrights,ensuring
networksecurity,anddroppingtransactioncostssothateventheunbankedcan
takepart.
Unlikeincumbentfirms,theydon’tneedabrandtoconveythe
trustworthinessoftheirtransactions.Bygivingawaytheirsourcecodeforfree,
sharingpowerwitheveryoneonthenetwork,usingconsensusmechanismsto
ensureintegrity,andconductingtheirbusinessopenlyontheblockchain,they
aremagnetsofhopeforthemanydisillusionedanddisenfranchised.Assuch,
blockchaintechnologyoffersacredibleandeffectivemeansnotonlyofcutting
outintermediaries,butalsoofradicallyloweringtransactioncosts,turningfirms
intonetworks,distributingeconomicpower,andenablingbothwealthcreation
andamoreprosperousfuture.
1.SearchCosts—HowDoWeFindNewTalentandNewCustomers?
Howdowefindthepeopleandinformationweneed?Howdowedetermineif
theirservices,goods,andcapabilitiesarebestforusasweseektobringthetonic
ofthemarkettobearonourinternaloperations?
Althoughthearchitectureofthefirmisbasicallyintact,thefirsteraofthe
Internetdroppedsuchcostssignificantlyandenabledimportantchanges.
Outsourcingwasreallyjustthebeginning.Tappingintoideagoras(openmarkets
forbrainpower),companieslikeProcter&Gamblearefindinguniquely
qualifiedmindstoinnovateanewproductorprocess.Infact,60percentof
P&G’sinnovationscomefromoutsidethecompany,bybuildingorharnessing
ideagoraslikeInnoCentiveorinno360.OtherfirmslikeGoldcorphavecreated
globalchallengestosearchforthebestmindstosolvetheirtoughestproblems.
Goldcorp,whichpublisheditsgeologicaldataandtalentoutsideitsboundaries,
discovered$3.4billionworthofgold,resultinginahundredfoldincreaseinthe
company’smarketvalue.
NowimaginetheopportunitiesthatarisefromtheabilitytosearchtheWorld
WideLedger,adecentralizeddatabaseofmuchoftheworld’sstructured
information.Whosoldwhichdiscoverytowhom?Atwhatprice?Whoowns
thisintellectualproperty?Whoisqualifiedtohandlethisproject?Whatmedical
skillsdoesourhospitalhaveonstaff?Whoperformedwhattypeofsurgerywith
whatoutcomes?Howmanycarboncreditshasthiscompanysaved?Which
suppliershaveexperienceinChina?Whatsubcontractorsdeliveredontimeand
onbudgetaccordingtotheirsmartcontracts?Theresultsofthesequerieswon’t
berésumés,advertisinglinks,orotherpushedcontent;they’llbetransaction
histories,proventrackrecordsofindividualsandenterprises,rankedperhapsby
reputationscore.Getthepicture?SaidVitalikButerin,founderoftheEthereum
blockchain,“Blockchainswilldropsearchcosts,causingakindof
decompositionthatallowsyoutohavemarketsofentitiesthatarehorizontally
segregatedandverticallysegregated.Thatneverreallyexistedbefore.Instead
youhadkindofmonolithsthatdoeverything.”
12
Severalcompaniesareworkingonsearchenginesforblockchains,giventhe
potentialbonanza.Google’smissionistoorganizetheworld’sinformation,soit
wouldmakesenseforittoassignconsiderablemanpowertoinvestigatethis.
TherearethreekeydistinctionsbetweenInternetsearchandblockchain
search.Firstisuserprivacy.Whiletransactionsaretransparent,peopleowntheir
personaldataandcandecidewhattodowithit.Theycanparticipate
anonymouslyoratleastpseudonymously(anonymitythroughafalsename)or
quasinymously(partialanonymity).Interestedpartieswillbeabletosearchfor
informationthatusershavemadeopen.AndreasAntonopoulossaid,
“Transactionsareanonymousifyouwantthemtobeanonymous....butthe
blockchainenablesradicaltransparencyaloteasierthanitenablesradical
anonymity.”
13
Manyfirmswillneedtorethinkandredesigntherecruitingprocess.For
example,humanresourcesorpersonnelstaffwillneedtolearnhowtoquerythe
blockchainwithyes/noquestions:Areyouahumanbeing?Haveyouearneda
PhDinappliedmathematics?CanyoucodeinScrypt,Python,Java,C++?Are
youavailabletoworkfulltimefromJanuarythroughJunenextyear?Andother
qualifications.Thesequerieswillscurryabouttheblackboxesofpeopleonthe
jobmarketandyieldalistofpeoplewhomeetthesequalifications.Theycould
alsopayprospectivetalenttoplacepertinentprofessionalinformationona
blockchainplatformwheretheycansortthroughit.HRstaffmustmastertheuse
ofreputationsystems,movingforwardwithcandidateswithoutknowing
anythingirrelevanttothejob,suchasage,gender,race,countryoforigin.They
alsoneedsearchenginesthatcannavigatevariousdegreesofopenness,from
fullyprivatetofullypublicinformation.Theupsideisanendtosubconsciousor
eveninstitutionalbiasandheadhunterorexecutiverecruitingfees.Thedownside
isthatprecisequeriesleadtopreciseresults.Thereislesspossibilityof
serendipity,thediscoveryofacandidatewholacksthequalificationsbuthas
greatcapacitytolearnandtomaketherandomcreativeconnectionsthatafirm
desperatelyneeds.
Dittoformarketing.Firmsmayhavetopayjusttoqueryaprospective
customersblackbox,toseewhetherthatcustomermeetsafirm’starget
audience.Thatcustomermaydecidegloballytowithholdcertaindatasuchas
gender,becauseanoanswerisstillvaluable.Butinsodoing,thefirmwilllearn
nothingmoreabouttheprospectbeyondtheyes/noresultsofthequery.Chief
marketingofficersandmarketingagencieswillneedtorethinkanystrategy
basedone-mail,socialmedia,andmobilemarketing:wheretheinfrastructure
maylowercommunicationscoststozero,customerswillraisecoststoafigure
thatmakesreadingafirm’smessageworththeirwhile.Inotherwords,you’llbe
payingcustomerstolistentoyourelevatorpitch,butyouwillhavetailoredyour
querytopitchonlytoasharplydefinedaudiencesothatyouwillbereaching
exactlythepeopleyouwanttoreachwithoutinvadingtheirprivacy.Youcantest
differentqueriestolearnaboutdifferentmicronichesateverystageofnew
productdevelopment.Let’scallitblackboxmarketing.
Theseconddistinctionisthatsearchcanbemultidimensional.Whenyou
searchtheWorldWideWebtoday,yousearchasnapshotintime,asindexed
overthelastseveralweeks.
14
ComputertheoristAntonopouloscalledthistwo-
dimensionalsearch:horizontal,awidesearchacrosstheWeb,andvertical,a
deepsearchofaparticularWebsite.Thethirddimensionissequence,tosee
theseintheorderofuploadingovertime.“Theblockchaincanaddtheadditional
dimensionoftime,”hesaid.Theopportunitytosearchacompleterecordof
everythingthateverhappenedinthreedimensionsisprofound.Tomakehis
point,Antonopoulossearchedthebitcoinblockchaintofinditsfamousfirst
commercialtransaction,thepurchaseoftwopizzasdonebysomeonenamed
“Laslo”for10,000bitcoins.“Theblockchainprovidesanalmostarchaeological
record,adeepfind,preservinginformationforever.”(Tosaveyoufromdoing
themath,ifthepizzacosts$5when$1wasequalto2,500bitcoins,thatwould
beworth$3.5millionasofthewritingofthisbook...butwedigress.)
Forfirms,thismeansaneedforbetterjudgment:managersneedtohire
peoplewhohavedemonstratedgoodjudgment,becausethere’snowalkingback
poordecisions,nospinningtheorderofevents,nodenyinganexecutive’s
disreputablebehavior.Forreallyimportantdecisions,firmscouldimplement
internalconsensusmechanismswherebyallstakeholdersvoteonmission-critical
decisionstoendthechorusofignoranceanddenialofpriorknowledge.Oruse
predictionmarketstotestscenarios.Ifyou’reanexecutiveofafutureEnron,no
scapegoating.AsforNewJerseygovernorChrisChristie,goodlucktellinga
prosecutorthatyouknewnothingofplanstoclosetheGeorgeWashington
Bridge.
Thethirddistinctionisvalue:whereinformationontheInternetisabundant,
unreliable,andperishable,itisscarce,tamperproof,andpermanentonthe
blockchain.Tothislastcharacteristic,Antonopoulosnotes:“Ifthereisenough
financialincentivetopreservethisblockchainintothefuture,thepossibilityofit
existingfortens,hundreds,oreventhousandsofyearscannotbediscounted.”
Whatanamazingconcept.Theblockchainaspartofthearchaeological
record,liketheoriginalstonetabletsofMesopotamia.Paperrecordsare
ephemeralandtemporary,whereas(ironically)theoldestformofrecording
information,tablets,isthemostpermanent.Theimplicationsforcorporate
architectureareconsiderable.Imagineapermanent,searchablerecordof
importanthistoricalinformation,likethehistoryoffinance.Corporatestaff
responsiblefordevelopingfinancialstatements,annualreports,reportsto
governmentsordonors,marketingmaterialsforprospectiveemployees,clients,
andconsumers—willstartwiththispublic,indisputableviewoftheirfirm,
maybeevencreatingafilterthatenablesstakeholderstoseewhattheyseeatthe
pressofabutton.Companiescouldhavetransactiontickertapesanddashboards,
someforinternalmanagerialuseandsomepublic.Restassured:Allyour
competitorswillconstructsuchfeedsanddashboardsofyourfirmaspartof
theircompetitiveintelligenceprograms.SowhynotputthoseonyourWebsite
anddraweveryonetoyou?
Thisprovidesenormousincentiveforfirmstolookforresourcesoutside
theirboundaries,astheyhavealmostinfinitelybetterinformationaboutthe
qualitiesandrecordofcandidates,betheyindividualsorcompanies.
CompanieslikeConsenSysaredevelopingidentitysystemswherejob
prospectsorprospectivecontractorswillprogramtheirownpersonalavatarsto
disclosepertinentinformationtoemployers.Theycan’tbehackedlikea
centralizeddatabasecan.Usersaremotivatedtocontributeinformationtotheir
ownavatarsbecausetheyownandcontrolthem,theirprivacyiscompletely
configurable,andtheycanmonetizetheirowndata.Thisisverydifferentfrom,
say,LinkedIn,acentraldatabaseowned,monetized,andyetnotentirelysecured
byapowerfulcorporation.
CouldCoaseandWilliamsonhaveimaginedaplatformthatcoulddrop
searchcostssothatfirmscouldfindcapabilityoutsidetheirboundariesthatcost
lessandcouldperformbetter?
2.ContractingCosts—WhatDoWeAgreetoDo,Anyway?
Howdowecometotermswithotherpartiesorenterintoanagreement?It’sone
thingtolowerthecostsoffindingpeopleandresourcesthatcandothejob.But
that’snotenoughtoshrinkafirmsignificantly.Allpartiesmustagreetowork
together.Thesecondreasonwhywehavefirmsiscontractualcosts,suchas
negotiatingtheprice,establishingcapacity,andspellingouttheconditionsofa
suppliersgoodsorservices;policingthemandenforcingtheterms;and
handlingremediesifpartiesdon’tdeliveraspromised.
We’vealwayshadsocialcontracts,understandingsofrelationshipsinthe
specializationofroleswheresomepeopleinthetribehuntedandprotectedthe
tribe,andothersgatheredandshelteredthetribe.Peoplehavetradedphysical
objectsinrealtimesincethedawnofmodernman.Contractsareamorerecent
phenomenon,aswebegantradingpromises,notproperty.Oralagreements
provedeasilymanipulatedormisremembered,andeyewitnesseswereunreliable.
Doubtanddistrusttemperedcollaborationwithstrangers.Contractshadtobe
fulfilledimmediately,andtherewerenoformalmechanismsforenforcementof
thetermsbeyondwhatyoucouldtakebyforce.Thewrittencontractwasaway
ofcodifyinganobligation,ofestablishingtrustandsettingexpectations.Written
contractsprovidedguidancewhensomeonedidnotholduphisendofthe
bargain,orsomethingunexpectedhappened.Buttheycouldn’texistina
vacuum;therehadtobesomelegalframeworkthatrecognizedcontractsand
enforcedeachparty’srights.
Todaycontractsarestillmadeofatoms(paper),notbits(software).Assuch
theyhavehugelimitations,servingtosimplydocumentanagreement.Aswe
shallsee,ifcontractsweresoftware—smartanddistributedontheblockchain—
theycouldopenaworldofpossibilities,nottheleastofwhichistomakeit
easierforcompaniestocollaboratewithexternalresources.Andjustimagine
howtheUniformCommercialCodemightlookontheblockchain.
Coaseandhissuccessorsarguedthatcontractingcostsarelowerinsidethe
boundariesoffirmsratherthanoutsideinthemarket—thatafirmisessentiallya
vehicleforcreatinglong-termcontractswhenshort-termcontractsaretoomuch
effort.
Williamsonadvancedthisideabyarguingthatfirmsexisttoresolve
conflicts,largelythroughmakingcontractswithvariouspartiesinsidethefirm.
Intheopenmarket,theonlydisputemechanismisthecourt—costly,timely,and
oftenunsatisfactory.Further,hearguedthatinsomecaseslikefraud,other
illegalacts,orconflictofinterest,thereisnomarketdisputemechanismatall.
“Ineffect,thecontractlawofinternalorganizationisthatofforbearance,
accordingtowhichafirmbecomesitsowncourtofultimateappeal.Firms,for
thisreason,areabletoexercisefiatthatthemarketscannot.”
15
Williamson
conceivedofthefirmas“agovernancestructure”forcontractualarrangements.
Hesaidthatorganizationalstructuremattersinreducingthecostsofmanaging
transactionsandthat“recoursetothelensofcontract,asagainstthelensof
choice,frequentlydeepensourunderstandingofcomplexeconomic
organization.”
16
Thisisarecurringthemeinmanagementtheory,perhapsmost
powerfullyexplainedbyeconomistsMichaelJensenandWilliamMeckling.
Theyarguedthatentitiesarenothingmorethanacollectionofcontractsand
relationships.
17
Today,someeruditeblockchainthinkershavepickeduponthisview.
EthereuminventorVitalikButerinarguesthatcorporateagents(i.e.,executives)
couldusecorporateassetsonlyforcertainpurposesapprovedby,say,aboardof
directors,whointurnaresubjecttoshareholderapproval.“Ifacorporationdoes
something,it’sbecauseitsboardofdirectorshasagreedthatitshouldbedone.If
acorporationhiresemployees,itmeansthattheemployeesareagreeingto
provideservicestothecorporation’scustomersunderaparticularsetofrules,
particularlyinvolvingpayment,”Buterinwrote.“Whenacorporationhaslimited
liability,itmeansthatspecificpeoplehavebeengrantedextraprivilegestoact
withreducedfearoflegalprosecutionbythegovernment—agroupofpeople
withmorerightsthanordinarypeopleactingalone,butultimatelypeople
nonetheless.Inanycase,it’snothingmorethanpeopleandcontractsalltheway
down.”
18
That’swhytheblockchain,byreducingcontractingcosts,enablesfirmsto
openupanddevelopnewrelationshipsoutsidetheirboundaries.ConsenSys,for
example,canarchitectcomplexrelationshipswithadiversesetofmembers,
someinsideitsboundaries,someoutside,andsomestraddlingwalls,because
smartcontractsgoverntheserelationshipsratherthantraditionalmanagers.
Membersself-assigntoprojects,defineagreed-upondeliverables,andgetpaid
whentheydeliver—allontheblockchain.
SmartContracts
Therateofchangeisincreasinglysettingthestageforsmartcontracts.More
peoplearedevelopingnotonlycomputerliteracy,butalsofluency.Asfaras
evidencingtransactionsgoes,thisnewdigitalmediumhassignificantlydifferent
propertiesfromitspaperpredecessors.AscryptographerNickSzabo
highlighted,notonlycantheycaptureagreaterarrayofinformation(suchas
nonlinguisticsensorydata)buttheyaredynamic:theycantransmitinformation
andexecutecertainkindsofdecisions.InSzabo’swords,“Digitalmediacan
performcalculations,directlyoperatemachinery,andworkthroughsomekinds
ofreasoningmuchmoreefficientlythanhumans.”
19
Forthepurposesofthisdiscussion,smartcontractsarecomputerprograms
thatsecure,enforce,andexecutesettlementofrecordedagreementsbetween
peopleandorganizations.Assuch,theyassistinnegotiatinganddefiningthese
agreements.Szabocoinedthephrasein1994,thesameyearthatNetscape,the
firstWebbrowser,hitthemarket:
Asmartcontractisacomputerizedtransactionprotocolthatexecutes
thetermsofacontract.Thegeneralobjectivesofsmartcontractdesign
aretosatisfycommoncontractualconditions(suchaspaymentterms,
liens,confidentiality,andevenenforcement),minimizeexceptionsboth
maliciousandaccidental,andminimizetheneedfortrusted
intermediaries.Relatedeconomicgoalsincludeloweringfraudloss,
arbitrationandenforcementcosts,andothertransactioncosts.
20
Backthen,smartcontractswereanideaalldressedupwithnowheretogo,
asnoavailabletechnologycoulddeploythemasSzabodescribed.Therewere
computersystemssuchaselectronicdatainterchange(EDI)thatprovided
standardsforthecommunicationofstructureddatabetweenthecomputersof
buyersandsellers,butnotechnologythatcouldactuallytriggerpaymentsand
causemoneytobeexchanged.
Bitcoinandtheblockchainchangedallthat.Nowpartiescanmake
agreementsandautomaticallyexchangebitcoinwhentheymeetthetermsofthe
agreement.Mostsimply,yourbrother-in-lawcan’tweaseloutofahockeybet.
Lesssimply,whenyoupurchaseastock,thetradesettlesinstantlyandtheshares
areimmediatelytransferredtoyou.Evenlesssimple,whencontractorsdeliver
thesoftwarecodethatmeetsthenecessaryspecifications,theygetpaid.
Thetechnologicalmeansofexecutinglimitedsmartcontractshasexistedfor
sometime.Acontractisabargained-forexchangeenforceablebeforethe
exchange.AndreasAntonopoulosexplainedwithasimpleexample:“Soifyou
andIweretoagreerightnowthatIwouldpayyoufiftydollarsforthepenon
yourdesk,that’saperfectlyenforceablecontract.Wecanjustsay,‘Ipromiseto
payyoufiftydollarsforthepenonyourdesk,’andyouwouldrespond,‘Yes,I
wouldlikethat.’Thatturnsouttobe‘offeracceptanceandconsideration.’We’ve
gotadeal,anditcanbeenforcedinacourt.Thathasnothingtodowiththe
technologicalmeansofimplementationofthepromisesthatwehavemade.”
WhatinterestsAndreasabouttheblockchainisthatwecanexecutethis
financialobligationinadecentralizedtechnologicalenvironmentwithabuilt-in
settlementsystem.“That’sreallycool,”hesaid,“becauseIcouldactuallypay
youforthepenrightnow,youwouldseethemoneyinstantly,youwouldputthe
peninthemail,andIcouldgetaverificationofthat.It’smuchmorelikelythat
wecandobusiness.”
Thelawprofessionisslowlypluggingintothisopportunity.Likeeveryone
inthemiddle,lawyersmaybecomesubjecttodisintermediationandwill
eventuallyneedtoadapt.Expertiseinsmartcontractscouldbeabigopportunity
forlawfirmsthatwanttoleadinnovationincontractlaw.However,the
professionisn’tknownforbreakingnewground.LegalexpertAaronWright,
coauthorofanewbookabouttheblockchain,toldus,“Lawyersarelaggards.”
21
Multisignature:SmartComplexContracts
But,yousay,wouldn’tthecostsofcomplexandtime-consumingnegotiationsof
smartcontractsoutweighthebenefitsofopenboundaries?Theansweratthis
pointappearstobeno.Ifpartnersspendmoretimeupfrontdeterminingthe
termsofanagreement,themonitoring,enforcement,andsettlementcostsdrop
significantly,perhapstozero.Further,settlementcanoccurinrealtime,possibly
inmicrosecondsthroughoutthedaydependingonthedeal.Mostimportant,by
partneringwithsuperiortalent,companiescanachievebetterinnovationand
becomemorecompetitive.
Let’sconsidertheuseofindependentcontractors.Intheearlydaysofdigital
trade,theblockchainaccommodatedonlythesimplesttwo-partytransactions.
Forinstance,ifAliceneededsomeonetocompleteapieceofcodequickly,she
wouldpostananonymous“coderneeded”requestonanappropriatediscussion
board.Bobwouldseeit.
22
Ifthepriceandtimingwereright,hewouldsend
worksamples.IfhissamplesmetAlice’sneeds,thenshemadeBobanoffer.
Theyagreedonterms:Alicewouldsendhalfthefeeimmediatelyandhalfupon
receiptofcompletionandsuccessfultestofthecode.
Theircontractwasstraightforward—anoffertohireandanacceptancetodo
thejob,anditneedn’thavebeeninwriting,thoughtheirinteractionsonthe
blockchainmadeitso.Theirownershipofbitcoinswasassociatedwithdigital
addresses(longstringsofnumbers)thathadtwocomponents:apublickeythat
servedasanaddress,andaprivatekeythatgaveitsownerexclusiveaccessto
anycoinsassociatedwiththataddress.BobsentAlicehispublickey,andshe
directedthefirstpaymentthere.Thenetworkrecordedthetransferand
associatedthosebitcoinstoBob’spublickeywallet.
Whatif,atthispoint,Bobdecidedthathedidn’twanttodotheproject?In
thistwo-partytransaction,Alicewouldhavelittlerecourse.Shecouldn’tgoto
hercreditcardcompanytoreversethetransaction.Shecouldn’t(yet)gotocivil
courtandsueBobforbreachofcontract.Beyondarandomlygenerated
alphanumericcodeandanonlineadvertisement,shewouldhavenowayof
identifyingBobunlesshe’dpostedhisadonacentralizedplatformthatcould
trackBobdown,orthey’dexchangede-mailsthroughacentralizedservice.She
could,however,indicatethathispublickeywasnottobetrusted,thuslowering
hisreputationscoreasacoder.
Withoutassurancesoftheotherparty’strustworthinessinfulfillingoff-chain
actions,thedealwasaprisonersdilemmaofsorts:itstillrequiredsometrust.
Reputationsystemscouldmitigatethisuncertaintytosomeextent.Butwe
neededtointroducetrustandsecurityintothisanonymousandopensystem.
In2012,“coredeveloper”GavinAndresenintroducedanewtypeofbitcoin
addresstothebitcoinprotocolscalled“paytoscripthash”(P2SH).Itspurpose
wastoallowoneparty“tofundanyarbitrarytransaction,nomatterhow
complicated.”
23
Partiesusemultipleauthenticatingsignaturesorkeysratherthan
asingleprivatekeytocompleteatransaction.Thecommunityusuallyrefersto
thismultiple-signaturefeatureassimply“multisig.”
Inamultisigtransaction,partiesagreeonthetotalnumberofkeysgenerated
(N)andhowmanywillberequiredtocompleteatransaction(M).Thisiscalled
anM-of-Nsignatureschemeorsecurityprotocol.Thinkofalockboxrequiring
multiplephysicalkeystoopen.Withthisfeature,BobandAlicewouldagreein
advancetoemployaneutral,disinterestedthird-partyarbitratortohelpthem
completetheirtransaction.Eachofthethreepartieswouldholdoneofthree
privatekeys,twoofwhichareneededtoaccessthetransferredfunds.Alice
wouldsendherbitcointoapublicaddress.Atthispoint,thosefundscanbe
viewedbyanyone,butaccessedbynoone.OnceBobseesthefundshavebeen
posted,hefulfillshisendofthebargain.If,uponreceiptofBob’sgoodor
service,Aliceisunsatisfiedandfeelscheated,shecouldrefusetoprovideBob
withthesecondkey.Thetwopartieswouldthenlooktothearbitrator,holderof
thethirdkey,tohelpthemresolvetheirdisagreement.Theinterventionofsuch
arbitratorsiscalledforonlyincasesofdisputeslikethese,andatnopointdo
theythemselveshaveaccesstothefunds—amechanismenablingtheriseof
“smartcontracts.”
Tocontractremotely,letaloneautomatically,youneedacertaindegreeof
trustthatthesystemwillenforceyourrightsunderthedeal.Ifyoucan’ttrustthe
otherparty,youhavetotrustthedisputeresolutionmechanismsand/orlegal
systembehindit.Multisigtechnologyallowsthesedeliberatelydisinterested
thirdpartiestobringsecurityandtrusttoanonymoustransactions.
Multisigauthenticationisgrowinginpopularity.Astart-upcalledHedgyis
usingmultisigtechnologytocreatefuturescontracts:partiesagreeonapriceof
bitcointhatwillbetradedinthefuture,onlyeverexchangingtheprice
difference.Hedgyneverholdscollateral.Thepartiesplaceitinamultisigwallet
untiltheexecutiondate.Hedgy’sgoalistousemultisigasafoundationforsmart
contractsthatarecompletelyself-executableandfullyevidencedonthe
blockchain.
24
Thinkoftheblockchainasadialecticbetweenanonymityand
openness,wherethemultisigfeaturereconcilesthetwowithoutlossofeither.
Amongotherthings,thesmartcontractchangestheroleofthosewithin
firmswhoareinthebusinessoffindingandcontractingfortalent.HR
departmentsneedtounderstandthattalentisoutsidetheirboundaries,notjust
inside.Theyneedtostepuptothechallengesofusingsmartcontractstolower
thecostsofbuildingrelationshipswithexternalresources.
3.CoordinationCosts—HowShouldWeAllWorkTogether?
Sowe’vefoundtherightpeopleandyou’vecontractedwiththem.Howdoyou
managethem?Throughouthiswritings,Coasediscussedcostsofcoordinating,
meshing,orotherwiseorchestratingthedifferentpeople,products,andprocesses
intoanenterprisethatcaneffectivelycreatevalue.Againsttraditional
economistswhoarguedthattherewereinternalmarketswithinfirms,Coasesaid
thatwhen“aworkmanmovesfromdepartmentYtodepartmentX,hedoesnot
gobecauseofachangeinrelativeprices,butbecauseheisorderedtodoso.”
25
Inotherwords,marketsallocateresourcesviathepricemechanism,butfirms
allocateresourcesviaauthoritativedirection.
Williamsonwentontoexplainthattherearetwosignificantcoordinating
systems.Firstisthepricesystemfordecentralizedresourceallocationneedsand
opportunities(themarket).Butsecond,(traditional)“firmsemployadifferent
organizingprinciple—thatofhierarchy—whereuponauthorityisusedtoaffect
resourceallocation.”Overthelastfewdecades,hierarchieshavecomeunder
scrutinyasstructuresforkillingcreativity,undermininginitiative,
disempoweringhumancapital,andscapegoatingresponsibilitythroughopacity.
Tobesure,manymanagementhierarchieshavebecomeunproductive
bureaucracies.However,hierarchyasaconcepthasgottenabadrap,ashasits
mosteloquentdefender,Canadian-bornpsychologistElliotJaques.Inaclassic
1990HarvardBusinessReviewarticle,Jaquesargued,“35yearsofresearch
haveconvincedmethatmanagerialhierarchyisthemostefficient,thehardiest,
andinfactthemostnaturalstructureeverdevisedforlargeorganizations.
Properlystructured,hierarchycanreleaseenergyandcreativity,rationalize
productivity,andactuallyimprovemorale.”
26
Thetroubleisthat,inrecentbusinesshistory,manyhierarchieshavenot
beeneffective,tothepointofridicule.ExhibitAisTheDilbertPrinciple,most
likelyoneofthebest-sellingmanagementbooksofalltime,byScottAdams.
Here’sDilbertonblockchaintechnologyfromarecentcartoon:
Manager:Ithinkweshouldbuildablockchain.
Dilbert:Uh-oh.Doesheunderstandwhathesaidorisitsomethinghe
sawinatrademagazinead?
Dilbert:Whatcolordoyouwantyourblockchain?
Manager:IthinkmauvehasthemostRAM.
Inthecartoon,Adamscapturesoneofthemarksofhierarchiesgonewrong
—thatmanagersoftenrisetoalevelofpowerwheretheylacktheknowledge
requiredforeffectiveleadership.
Combinedwithprogressivemanagementthinkingabouthowtobuild
effective,innovativeorganizations,thefirstgenerationoftheInternetenabled
progressivethinkingmanagerstochangethetop-downassignmentofworkand
appropriationofcredit,recognition,andpromotion.
Forbetterorforworse,centralizedhierarchiesarethenorm.
Decentralization,networking,andempowermenthavebeensensiblesincethe
earlydaysoftheInternet.Teamsandprojectshavebecomethefoundationof
internalorganization.E-mailenabledpeopletocollaborateacrossorganizational
silos.Socialmediadroppedsomecollaborationcostsinternallyanddropped
transactioncostsandmadetheboundariesofcorporationsmoreporousas
companiescouldlinkupwithsuppliers,customers,andpartnersmoreeasily.
However,today’scommercialsocialmediatoolsarehelpingmanyfirms
achievenewlevelsofinternalcollaboration.Empowerment,thereal
decentralizationofpower,isanimportantfocusinbusiness;andcompanieshave
experimentedorimplementednewconceptsrangingfrommatrixmanagementto
holacracy—withvaryingdegreesofsuccess.
Infact,thereiswidespreadagreementthatwhenfirmsdistribute
responsibility,authority,andpower,theresultwilltypicallybepositive:better
businessfunction,customerservice,andinnovation.Butthispracticeiseasier
saidthandone.
TheInternetalsohasn’tdroppedwhateconomistscall“agencycosts”—the
costofmakingsurethateverybodyinsidethefirmisactingintheowners
interest.Infact,anotherNobelPrize–winningeconomist(yes,theredoseemto
bealotoftheminthisstory),JosephStiglitz,arguedthatthesheersizeand
seemingcomplexityofthesefirmshaveincreasedagencycostsevenasafirm’s
transactioncostshaveplummeted.Hence,thehugepaygapbetweenCEOand
frontline.
Sowheredoesblockchaintechnologycomeinandhowcanitchangehow
firmsaremanagedandcoordinatedinternally?Withsmartcontractsand
unprecedentedtransparency,theblockchainshouldnotonlyreducetransaction
costsinsideandoutsideofthefirm,butitshouldalsodramaticallyreduce
agencycostsatalllevelsofmanagement.Thesechangeswillinturnmakeit
hardertogamethesystem.Sofirmscouldgobeyondtransactioncosttotackle
theelephantintheboardroom—agencycost.YochaiBenklertoldus,“What’s
excitingtomeaboutblockchaintechnologyisthatitcanenablepeopleto
functiontogetherwiththepersistenceandstabilityofanorganization,but
withoutthehierarchy.”
27
Italsosuggeststhatmanagersshouldbracethemselvesforradical
transparencyinhowtheydocoordinateandconductthemselvesbecause
shareholderswillnowbeabletoseetheinefficiencies,theunnecessary
complexity,andthehugegapbetweenexecutivepayandthevalueexecutives
actuallycontribute.Remember,managersaren’tagentsofowners;they’re
intermediaries.
4.Costsof(Re-)BuildingTrust—WhyShouldWeTrustOneAnother?
Aswehaveexplained,trustinbusinessandsocietyistheexpectationthat
anotherpartywillbehonest,considerate,accountable,andtransparent—thathe
orshewillactwithintegrity.
28
It’salotofworktoestablishtrust,andmany
economistsandotheracademicsarguethatwehaveverticallyintegratedfirms
becauseestablishingtrustiseasierwithincorporateboundariesthaninanopen
market.Withtrustatanall-timelow,thechallengeforfirmsisnotsimply
figuringoutwhomtotrust,buthowtogetoutsidecapabilitytotrustthem.
Indeed,economistMichaelJensenandcolleaguesmadethecasethat
integrityisafactorofproduction.Notthefirstbutamongthemosteloquenton
thetopic,theyexplainthattheseeminglynever-endingscandalsintheworldof
financewiththeirdamagingeffectsonvalueandhumanwelfarearguestrongly
fortheadditionofintegritytofinancialoperations.Tothemthisisnotanissue
ofvirtue,butanopportunityinfinancialeconomicsto“createsignificant
increasesineconomicefficiency,productivity,andaggregatehumanwelfare.”
Tothem,“Integrity...onthepartofindividualsororganizationshasenormous
economicimplications(forvalue,productivity,qualityoflife,etc.).Indeed,
integrityisafactorofproductionasimportantaslabor,capital,and
technology.”
29
WallStreetlosttrust(andnearlykilledcapitalism)becauseofasetof
integrityviolations.Buthasitchanged?Andwillitchange?Inthepast,
corporatesocialresponsibilityadvocatesarguedthatcompanies“dowellby
doinggood.”Wehaven’tseentheevidence.Manycompaniesdidwellbydoing
bad—byhavingbadlaborpracticesinthedevelopingworld,byexternalizing
theircostsontosocietysuchaspollution,bybeingmonopoliesandgouging
customers.Thecollapseof2008taughtusforsurethatcompanies“dobadlyby
beingbad.”Themajorbanksfoundthisoutthehardway.Priorto2008many
weremakingupwardsof20percentreturnonequity.Formanytodayitiswell
below5percent,withsomenotevenmakingtheircostofcapital.Froma
shareholderperspective,theyshouldnolongerexist.
30
Whatarethechances,realistically,thatWallStreetwillwakeuptoJensen’s
exhortationsandactwithintegrity?Surely,expedienceandshort-termgainare
codedintotheDNAoftheWesternfinancialsystem.
Enterblockchaintechnologyanddigitalcurrencies.Whatifpartiesdidn’t
havetotrustoneanother,butcouldstillactwithhonesty,accountability,
consideration,andtransparencybecauseitwasthefoundationofthe
technologicalplatformoffinance?
SteveOmohundrogaveusacompellingexample.“Ifsomebodyfrom
NigeriawantstobuysomethingthatI’mselling,I’mgoingtobeveryskeptical,
I’mnotgoingtoacceptacreditcardoracheckfromNigeria.Withthenew
platform,IknowIcantrustitandIdon’thavetoincurthecostsofestablishing
trust.Soitenablestransactionswhichsimplycouldn’thappenotherwise.”
31
SoWallStreetbanksdon’thavetospliceintegrityintotheirDNAand
behavior;thefoundersofblockchainshavecodeditintotheirsoftwareprotocols
anddeployeditacrossthenetwork—enablinganewutilityforthefinancial
servicesindustry.Thegoodnewsisthattheindustrycanreestablishtrustand
maintainitinanongoingway.
Withblockchaintechnologycausingthecostsofsearching,contracting,
coordinating,andcreatingtrusttoplummet,itshouldbeeasierforfirmsnotjust
toopenup,butalsotoforgetrustingrelationshipswithexternalparties.Acting
inone’sself-interestserveseverybody’sinterests.Cheatingthesystemcosts
morethanusingitasdesigned.
Thisisnottosaythatcorporatebrandsorforthatmatteractingethicallyis
unimportantornolongerrequired.Blockchainhelpsensureintegrityand
thereforetrustintransactionsbetweenpeers.Italsohelpsachievetransparency
—acriticalfactorintrust.However,asauthorandtechnologytheoristDavid
Ticollsays:“Trustandbrandareaboutmorethanvouchsafingatransaction.
Theyarealsoaboutquality,enjoyment,safetyofadeviceorservice,cachetand
coolness.Intoday’sCOP21world,thebestbrandstransparentlyandverifiably
signifyoutcomesthatareenvironmentally,socially,andeconomically
responsible.”
32
Still,throughsmartcontracts,executivescanbeheldaccountable—they
mustabidebytheircommitmentsasenforcedandsettledbysoftware.
Companiescanprogramrelationshipswithradicaltransparencysoeveryonehas
abetterunderstandingaboutwhateachpartyhassigneduptodo.Andoverall,
likeitornot,theymustconductbusinessinawaythatisconsiderateofthe
interestsofotherparties.Theplatformdemandsit.
DETERMININGCORPORATEBOUNDARIES
Overall,theboundariesthatseparateacompanyfromitsvendors,consultants,
customers,externalpeercommunities,andotherswillbecomehardertodefine.
Perhapsasimportant,theywillconstantlychange.
Firmswillstillexist,blockchainnotwithstanding,becausethemechanisms
forsearching,contracting,coordinating,andestablishingtrustwithincorporate
boundarieswillbemorecost-effectivethanthoseintheopenmarket,atleastfor
manyactivities.Theideaoftheso-calledfreeagentnation,whereindividuals
executeworkoutsidetheboundariesofcorporations,isillusory.MelanieSwan,
whofoundedtheInstituteforBlockchainStudies,said,“What’stherightsizeof
thecorporationforoptimaltransactibility?Well,it’snotaunitarything,of
peopleworkingonlyasindividualsore-lancers.”Toher,therewillbenewkinds
of“flexiblebusinessentitiesofindividualsandgroupspartneringaround
projects.”Sheviewsthenewmodelofthefirmmoreliketheguild,the
preindustrialassociationsofmerchantsortradesmenwhoworkedtogetherina
particulartown.“Westillneedorganizationsactingascoordinatingmechanisms.
Butthenewmodelsofteamcollaborationarenotyetfullyclear.”
33
Todayweoftenhearthatfirmsshouldfocusontheircore.Butwhen
consideringhowblockchaintechnologydropstransactioncosts,whatiscore?
Andhowdoyoudefinethatwhenacompany’scoreisconstantlychanging?
Itseemsthateveryonehasadifferentdefinitionofwhattheoptimalfirmsize
shouldbetomaximizeproductivityandcompetitiveadvantage.Manyfirmswe
examineddidn’thaveaclearview,seemingtochoosetheBobDylanapproach
todeterminingwhat’sinandwhatshouldbeout(“Youdon’tneedaweatherman
toknowwhichwaythewindblows”).Back-officeprocessing,forexample,was
describedasano-brainer,withoutanyclearcriteriaastowhy.
Somearemorerigorous.Fromthecorecompetenciesviewdevelopedby
GaryHamelandC.K.Prahalad,firmsgaincompetitiveadvantagethrough
competencemastery.Thosecompetenciesmasteredarecentraltothefirm,while
otherscanbeacquiredfromoutside.
34
However,afirmmayhavemasteryover
someactivitiesthatarenotmissioncritical.Shouldtheystillbekeptinside?
StrategistMichaelPorterhasanimplicitviewthatcompetitiveadvantage
stemsfromactivities,inparticularfromnetworksofreinforcingactivitiesthat
arehardtoreplicateintheirtotality.It’snottheindividualpartsofthebusiness
thatmatter,buthowtheyarestrungtogetherandbuilttoreinforceoneanotherin
auniqueactivitysystem.Competitiveadvantagecomesfromtheentiresystem
ofactivities;whileanyindividualactivitywithinthesystemmaybecopied,
competitorscannotproducethesamebenefitunlesstheymanagetoduplicatethe
entiresystem.
35
Othersarguethatcompaniesshouldalwaysretainfunctionsorcapabilities
thataremissioncritical—thosethatfirmsmustabsolutelygetrightforsurvival
andsuccess.Butmakingcomputersismissioncriticalforcomputercompanies;
yetDell,HP,andIBMoutsourcemuchofthisactivitytoelectronics
manufacturingservicescompanieslikeCelestica,Flextronics,orJabil.Final
assemblyofvehiclesismissioncriticalforanautomanufacturer;yetBMWand
MercedescontractwithMagnatodothisactivity.
StanfordGraduateSchoolofBusinessprofessorSusanAtheyargues
persuasively:“Theremaybesomemission-criticalfunctions,likethecollection
andanalysisofbigdata,thatarejusttooriskytomoveoutsidecorporate
boundaries,evenifyoudon’thaveuniqueabilitiesinthatarea.”
36
True,there
maybesomefunctionslikedataanalyticswheresurvivaldependsonbeing
uniquelygood,andtheremaybeexistentialrisksofpartnering.Still,external
resourcescanbedeployedstrategicallytobuildinternalcapability.
Ourviewisthatthestartingpointforcorporateboundarydecisionsisto
understandyourindustry,competitors,andopportunitiesforprofitablegrowth—
andusethisknowledgeasthebasisfordevelopingabusinessstrategy.From
there,theblockchainopensupnewopportunitiesfornetworkingthatevery
managerandknowledgeworkerneedstoconsideratalltimes.Boundarychoices
arenotsimplyforseniorexecutives,theyareforanyonewhocaresabout
marshalingthebestcapabilityforinnovationandhighperformance.Weshould
add—andthisisnosmallpoint—thatyoucan’toutsourceyourcorporateculture.
EntertheMatrix
Takingintoaccounthowblockchaintechnologycanenableaccesstounique
capabilitiesoutsidecorporateboundaries,firmscannowdefinethosebusiness
activitiesorfunctionsthatarefundamentaltocompetitiveness—thatareboth
missioncriticalandalsouniqueenoughtoensuredifferentiatedvalue.
However,thisIn-OutMatrixisjustastartingpointfordefiningcorporate
boundariesatanygivenpoint.Whatotherfactorsshouldfirmsconsiderin
determiningwhatisfundamental?Whatextenuatingcircumstancesaretherethat
mightaffectchoicestooutsourceornurtureinternally?
HackingYourFuture:BoundaryDecisions
Whenmakingboundarychoices,firmsshouldstartusingtheblockchainto
marshala360-degreeviewandreachconsensusonwhatisuniqueandwhatis
missioncriticalintheirbusiness.Let’sreturntoJoeLubinandConsenSys,as
theyforeshadowthemodusoperandioftheblockchain-basedenterprise.
RememberthatConsenSysisinitsinfancy,andmuchcangowrongto
undermineitsbusiness.Wecanstilllearnfromthiscompany’sexample.
1.Aretherepossiblepartnerswhocoulddotheworkbetter?In
particular,couldwebenefitfromharnessingnewpeerproduction
communities,ideagoras,openplatforms,andotherblockchainbusiness
models?ThecompanyConsenSysisabletoorchestrateextraordinary
expertisetodoitswork,eventhoughmanyareoutsideitsboundaries.
2.Givenblockchaintechnology,whataretheneweconomicsof
corporateboundaries—thetransactioncostsofpartnering,versus
keeping/developingin-house?Canyoudevelopasuiteofsmart
contractswhosecoreelementsaremodularandreusable?ConsenSys
usessmartcontractstoreducecoordinationcosts.
3.Whatistheextentoftechnologicalinterdependenceversus
modularity?Ifyoucandefinebusinesscomponentsthataremodular,
thenyoucaneasilyreconfigurethemoutsidecorporateboundaries.
ConsenSyssetsstandardsforsoftwaredevelopmentandprovidesaccess
tovarioussoftwaremodulesthatitspartnerscanbuildupon.
4.Whatareyourfirm’scompetencieswithregardtothemanagingof
outsourcedwork?Cansmartcontractsenhancethosecompetenciesand
lowercosts?Fromtheget-go,ConsenSyswasablockchainbusiness.
CEOJoeLubinembracesthetechnologyandamodifiedholacracy,and
wecanseethesevendesignprinciplesatwork.
5.Whataretherisksofopportunismwhereapartnermightencroachon
fundamentalpartsofyourbusiness,assomehavesuggestedFoxconn
maydotosmartphonecompanies?ConsenSystriestomitigatethis
challengebybuildingloyaltythroughincentivestructureswherebyits
talentsharesinthewealththeycreate.
6.Aretherelegal,regulatory,orpoliticalobstaclestodeepernetworking
(andshrinking)oftheorganization?NotaproblemforConsenSysyet.
7.Speedandpaceofinnovationareimportanttoboundarydecisions.
Sometimesfirmshavenochoicebuttopartnerforastrategicfunction
becausetheycannotdevelopitin-housefastenough.Apartner
arrangementcanbeaplaceholder.Willpartneringhelpusbuildan
ecosystemthatwillimproveourcompetitiveadvantage?Thisis
ConsenSys’sstrategy:buildanetworkofcollaboratorsaroundthe
Ethereumplatform,growtheplatformandecosystem,andincreasethe
probabilityofsuccessforallcomponents.
8.Isthereadangeroflosingcontrolofsomethingfundamental—for
example,aproductornetworkarchitecture?Firmsmusthaveasenseof
whichpartsofthevaluechainwillbekeytocreatingandcapturing
valueinthefuture.Ifthesearefarmedout,thefirmwilllose.The
EthereumplatformprovidesabasicarchitectureforConsenSys.
9.Isthereacapability,liketheexploitationofdataassets,thatmustbe
partofthefabricofyourenterpriseandallitsoperations?Even
thoughyoulackauniquecapability,youshouldviewpartneringasa
transitionaltactictodevelopextraordinaryinternalexpertiseand
capacity.Blockchaintechnologieswillintroduceanewsetof
capacitiesthatneedtoresideinthecraniumofeveryemployee.You
can’tmovecultureoutsideyourboundaries.
F
CHAPTER5
NEWBUSINESSMODELS:
MAKINGITRAINONTHEBLOCKCHAIN
oundedamonthbeforethemarketcrashedin2008,Airbnbhasbecomea
$25billionplatform,nowtheworld’slargestsupplierofroomsasmeasured
bymarketvalueandroomsoccupied.Buttheprovidersofroomsreceiveonly
partofthevaluetheycreate.InternationalpaymentsgothroughWesternUnion,
whichtakes$10ofeverytransactionandbigforeignexchangeoffthetop.
Settlementstakealongtime.Airbnbstoresandmonetizesallthedata.Both
rentersandcustomersalikehaveconcernsaboutprivacy.
WebrainstormedwithblockchainexpertDinoMarkAngaritistodesignan
Airbnbcompetitorontheblockchain.Wedecidedtocallournewbusiness
bAirbnb.Itwouldlookmorelikeamember-ownedcooperative.Allrevenues,
exceptforoverhead,wouldgotoitsmembers,whowouldcontroltheplatform
andmakedecisions.
BAIRBNBVERSUSAIRBNB
bAirbnbisadistributedapplication(DApp),asetofsmartcontractsthatstores
dataonahome-listingsblockchain.ThebAirbnbapphasanelegantinterface:
ownerscanuploadinformationandpicturesoftheirproperty.
1
Theplatform
maintainsreputationscoresofbothprovidersandrenterstoimproveeveryone’s
businessdecisions.
Whenyouwanttorent,thebAirbnbsoftwarescansandfiltersthe
blockchainforallthelistingsthatmeetyourcriteria(e.g.,tenmilesfromthe
EiffelTower,twobedrooms,four-plusstarratingsonly).Youruserexperienceis
identicaltothatinAirbnb,exceptthatyoucommunicatepeertopeeronthe
network,throughencryptedandcryptographicallysignedmessagesnotstoredin
Airbnb’sdatabase.
2
Youandtheroomowneraretheonlytwopeoplewhocan
readthesemessages.Youcanswapphonenumbers,anexchangethatAirbnb
blockstopreservefuturerevenues.OnbAirbnbyouandtheownercould
communicateoff-chainandcompletethetransactionentirelyoff-chain,butyou
arebetteroffcompletingthetransactionon-chainforafewreasons.
Reputation:Becausethenetworkrecordsthetransactionontheblockchain,
apositivereviewfromeachuserimprovesyourrespectivereputations.Therisk
ofanegativereviewmotivateseachpartytoremainhonest.Remember,people
withgoodreputationscanusethesamepersonaacrossmultipleDAppsand
benefitfromcontinuityasagoodperson.
IdentityVerification:Becausewearenotdealingwithacentralizedsystem
thatchecksIDonourbehalf,eachpartyneedstoconfirmtheotherparty’s
identity.Theblockchaincallsupacontractfroma“VerifyID”application,oneof
manycontractsthatbAirbnb,SUber(blockchainUber),andotherDAppsuseto
verifyreal-worldidentity.
PrivacyProtection:VerifyIDdoesn’ttrackandstorealltransactionsina
database.ItsimplyreturnsaTRUEorFALSEwhenitreceivesarequestfor
verificationofapublickey(persona).DifferentkindsofDAppscancall
VerifyID,butVerifyIDneverknowsdetailsoftransactions.Thisseparationof
identityfromactivitygreatlyimprovesyourprivacy.
RiskReduction:Homeownerscurrentlystorecustomeridentitiesand
financialdataontheirownservers,whichcanbehackedandleaked,exposing
ownerstolitigationandlargeliabilities.Ontheblockchain,youneedn’ttrusta
vendorwithyourdata;thereisnocentraldatabasetohackandleak.Thereare
onlyindividualpeer-to-peerpseudonymoustransactions.
Insurance:TodayAirbnboffers$1millioninsuranceforownersand
compensatesthemfortheftanddamage.OnbAirbnb,ownerscangetthe
bAirbnbinsuranceDApp.Renterswithgoodreputationslikeyouhavelower
insuranceratesandneedn’tsubsidizerenterswholackcaution,scrutinyof
prospects,orpoortreatmentofproperty.Whenyousubmitabookingrequest,
bAirbnbsendsyourpublickey(persona)totheinsurancecontractforaquote.
TheinsuranceDAppcontactsalistoftrustedproviders;fakeinsurersneednot
apply.Insurersperformtheirowncalculationsinrealtimethroughautonomous
agentsoftwarebasedontheinputstothecontract—suchasthemarketvalueof
theownershouse,howmuchtheownerwantsinsured,ownerreputation,your
reputationasarenter,andrentalprice.bAirbnbtakesthebestbidandaddsitto
thenightlyfeetheownerwantstocharge.Theblockchainprocessesthis
calculationinthebackground;ownersandrentershaveacomparableuser
experiencetothatofAirbnbbutasuperiorandmoreequitablevalueexchange.
PaymentSettlement:Ofcourse,ontheblockchain,youtransferfundsto
theownerinseconds,notdaysaswithAirbnb.Ownerscanmanagesecurity
depositsmoreeasilywithsmartcontracts.Somepartiesuseescrowaccountsto
releasepaymentspartially(nightly,weekly,hourly,etc.)orinfullastheparties
agree.Indisputesinvolvingsmartcontracts,partiescancallforarbitration.
PropertyAccessUsingSmartLocks(IoTdevice):Asmartlockconnected
totheblockchainknowswhenyouhavepaid.Whenyouarrive,yournear-field
communication-enabledsmartphonecansignamessagewithyourpublickeyas
proofofpayment,andthesmartlockwillopenforyou.Ownersneednotdrop
keysofftoyouorvisitthepropertyunlesstheywanttosayhellooraddress
someemergency.
Youandtheownerhavenowsavedmostofthe15percentAirbnbfee.
Settlementsareassuredandinstant.Therearenoforeignexchangefeesfor
internationalcontracts.Youneednotworryaboutstolenidentity.Local
governmentsinoppressiveregimescannotsubpoenabAirbnbforallitsrental
historydata.Thisistherealsharing-of-valueeconomy;bothcustomersand
serviceprovidersarethewinners.
GLOBALCOMPUTING:THERISEOFDISTRIBUTED
APPLICATIONS
BeforeweexaminetheotherpossibledistributedbusinessentitieslikebAirbnb,
awordonhowtheunderlyingtechnologyenablesdecentralization.Untilthe
blockchain,centralizedorganizationshaveheldconcentratedcomputingpower.
Inthefirstdecadesofenterprisecomputing,allsoftwareapplications(apps)
ranonthecomputersoftheirowners.GM,Citibank,U.S.Steel,Unilever,and
theU.S.federalgovernmentownedhugedatacentersthatranproprietary
software.Companiesrentedor“timeshared”computerpowerfromproviders
likethe1980sgiantCompuServetoruntheirownapplications.
Asthepersonalcomputermatured,thesoftwaremarketspecialized:some
developedclientapps(thePC)andsome,serverapps(ahostcomputer).With
widespreadadoptionoftheInternet,specificallytheWorldWideWeb,
individualsandcompaniescouldusetheircomputerstoshareinformation—
initiallyastextdocumentsandlaterasimages,videos,othermultimediacontent,
andeventuallysoftwareapps.
3
Sharingbegantodemocratizetheinformation
landscape.Butitwasshort-lived.
Inthe1990s,anewvariantoftime-sharingappeared,initiallycalledvirtual
privatenetworks(VPNs)andthencloudcomputing.Cloudcomputingenabled
usersandcompaniestostoreandprocesstheirsoftwareanddatainthird-party
datacenters.NewtechnologycompanieslikeSalesforce.combuiltfortunesby
harnessingthecloudmodeltosavecustomersthebigcostsofdevelopingand
runningtheirownsoftware.CloudserviceproviderslikeAmazonandIBMbuilt
ginormousmultibillion-dollarbusinesses.Duringthe2000s,socialmedia
companieslikeFacebookandGooglecreatedservicesthatranontheirownvast
datacenters.Andtocontinuethistrendofcentralizedcomputing,companieslike
ApplemovedawayfromtheWeb’sdemocratizingarchitecturetoproprietary
platformsliketheAppleStorewherecustomersacquiredproprietaryapps,not
ontheopenWebbutinexclusivewalledgardens.
Againandagaininthedigitalage,largecompanieshaveconsolidated—
created,processed,andownedoracquired—applicationsontheirownlarge
systems.Centralizedcompanieshavebegottencentralizedcomputing
architecturesthathave,inturn,centralizedtechnologicalandeconomicpower.
Someredflags:Withsinglepointsofcontrol,companiesthemselvesare
vulnerabletocatastrophiccrashes,fraud,andsecuritybreaches.Ifyouwerea
customerofTarget,eBay,JPMorganChase,HomeDepot,orAnthem,orforthat
matterAshleyMadison,theU.S.OfficeofPersonnelManagement(second
breach!),andevenUber,youfeltthepainofhackingin2015.
4
Systemsof
differentpartsofacompanystillhavebigchallengescommunicatingwithone
another,letalonewithsystemsoutsidethefirm.Forususers,itmeansthat
we’veneverreallyhadcontrol.Othersdefineourserviceswiththeirimplicit
valuesandgoalsthatmayconflictwithours.Aswegeneratereamsofvaluable
data,othersownitandarebuildingvastfortunes—perhapsthegreatestin
history—whilemostofusreceivelittlebenefitorcompensation.Worstofall,
centralpowersareusingourdatatocreatemirrorimagesofeachofusandmay
usethesetosellusstuffortospyonus.
Alongcomesblockchaintechnology.Anyonecanuploadaprogramonto
thisplatformandleaveittoself-executewithastrongcryptoeconomical
5
guaranteethattheprogramwillcontinuetoperformsecurelyasitwasintended.
Thisplatformispublic,notinsideanorganization,anditcontainsagrowingset
ofresourcessuchasdigitalmoneytoincentandrewardcertainbehavior.
We’removingintoanewerainthedigitalrevolutionwherewecanprogram
andsharesoftwarethat’sdistributed.Justastheblockchainprotocolis
distributed,adistributedapplicationorDApprunsacrossmanycomputing
devicesratherthanonasingleserver.Thisisbecauseallthecomputing
resourcesthatarerunningablockchainconstituteacomputer.Blockchain
developerGavinWoodmakesthispointdescribingtheEthereumblockchainasa
platformforprocessing.“ThereisonlyoneEthereumcomputerintheworld,”he
said.“It’salsomultiuser—anyonewhoeverusesitisautomaticallysignedin.”
BecauseEthereumisdistributedandbuilttothehigheststandardsof
cryptosecurity,“allcode,processing,andstorageexistswithinitsown
encapsulatedspaceandnoonecanevermesswiththatdata.”Hearguedthat
criticalrulesarebuiltintothecomputer,comparingitto“virtualsilicon.”
6
AsforDApps,therehavebeenwarm-upactspriortoblockchains.
BitTorrent,thepeer-to-peerfile-sharingapp,demonstratesthepowerofDApps
asitcurrentlyconsumesover5percentofallInternettraffic.
7
Loversofmusic,
film,andothermediasharetheirfilesforfree,withnocentralserverfor
authoritiestoshutdown.IconoclasticprogrammerBramCohen,who
incidentallyislessthanenthusiasticaboutbitcoinbecauseofallthecommercial
activityaroundit,developedBitTorrent.“Therevolutionwillnotbemonetized,”
hesaid.
8
Mostofusthinkthatgeneratingrevenueandeconomicvaluethrough
technologicalinnovationispositive,aslongastherevolutionisnotmonetized
bythefew.WithblockchaintechnologythepossibilitiesforDAppsarealmost
unlimited,becauseittakesDAppstoanewlevel.If,asthesongsays,“Loveand
marriage,loveandmarriage,gotogetherlikeahorseandcarriage,”thensodo
DAppsandblockchains.ThecompanyStorjisadistributedcloudstorage
platformandasuiteofDAppsthatallowuserstostoredatasecurely,
inexpensively,andprivately.Nocentralizedauthorityhasaccesstoausers
encryptedpassword.Theserviceeliminatesthehighcostsofcentralizedstorage
facilities;it’ssuperfast;anditpaysusersforrentingtheirextradiskspace.It’s
likeAirbnbforyourcomputerssparememoryspace.
THEDAPPKINGS:DISTRIBUTEDBUSINESSENTITIES
HowdoDAppsinfusegreaterefficiency,innovation,andresponsivenessintothe
structureofthefirm?WhatnewbusinessmodelscanwemakewithDAppsto
generatevalue?Andifpowerfulinstitutionsarecapturingthebenefitsofthe
Internettoday,howcanwemovebeyond“outsourcing”and“businesswebs”to
trulydistributedmodelsofinnovationandvaluecreationthatcandistribute
prosperityandtheownershipofdataandwealth?Wemappedwhatwebelieveto
bethefourmostimportantinnovationsontoatwo-by-twomatrix.
TheY-axisidentifiesthedegreetowhichhumansparticipateinthemodel.
Attheleft,themodelrequiressomehumaninvolvement.Attheright,themodel
requiresnopeople.
TheX-axisdescribesthefunctionalcomplexityofthemodel,notits
technicalcomplexity.Atthelowerendaremodelsthatperformasinglefunction.
Atthetoparemodelsthatperformdiversefunctions.
Theseareallcomponentsoftheblockchaineconomybecausetheyuse
blockchaintechnologyandoftencryptocurrenciesastheirfoundation.Smart
contracts(discussedinthelastchapter)arethemostbasicform:theyinvolve
somecomplexitythatrequireshumaninvolvement,increasinglyintheformof
multisignatureagreements.Assmartcontractsgrowincomplexityand
interoperatewithothercontracts,theycancontributetowhatwecallopen
networkedenterprises(ONEs).IfwecombineONEswithautonomousagents
softwarethatmakesdecisionsandactsonthemwithouthumanintervention—we
getwhatwe’recallingadistributedautonomousenterprisethatrequireslittleor
notraditionalmanagementorhierarchytogeneratecustomervalueandowner
wealth.Andwethinkthatverylargenumbersofpeople,thousandsormillions,
mightbeabletocollaborateincreatingaventureandsharinginthewealthit
creates—distributing,ratherthanredistributing,wealth.
OpenNetworkedEnterprises
Atverylowcost,smartcontractsenablecompaniestocraftclever,self-enforcing
agreementswithpreviouslyimprobableclassesofnewsuppliersandpartners.
Whenaggregated,smartcontractscanmakefirmsresemblenetworks,rendering
corporateboundariesmoreporousandfluid.
BlockchaintechnologyalsodropsCoase’ssearchcostsandcoordination
costssothatcompaniescandisaggregateintomoreeffectivenetworks.Anauto
companycouldcheckasupplierstrustworthinessbyjustscanningtheanalytic
servicesonline.Soon,justtype“axle”or“windowglass”intoanynumberof
industryexchangesontheblockchainandnegotiatethepriceonline.
Wecanextendthatsimplescenariotofindingareplacementpart,asupply
chainpartner,acollaborator,orapieceofsoftwareformanagingadistributed
resource.NeedsteelfromChina,rubberfromMalaysia,orglassfromWichita,
Kansas?Noproblem.DecentralizedonlineclearinghousesoperatingasDApps
foreachcommoditywillenablepurchaserstocontractforprice,quality,and
deliverydateswithafewclicksofamouse.You’llhaveadetailedsearchable
recordofprevioustransactions—notjusthowvariouscompanieswereratedbut
preciselyhowtheyhonoredtheircommitments.Youcantrackeachshipmenton
avirtualmapthatshowsitspreciselocationinthejourney.Youcan
microschedulegoodstoshowupjustintime.Nowarehouserequired.
AUTONOMOUSAGENTS
ImagineapieceofsoftwarethatcouldroamtheInternetwithitsownwalletand
itsowncapacitytolearnandadapt,inpursuitofitsgoalsdeterminedbya
creator,purchasingtheresourcesitrequirestosurvivelikecomputerpower,all
whilesellingservicestootherentities.
Thetermautonomousagenthasmanydefinitions.
9
Forourdiscussion,itisa
deviceorsoftwaresystemthatonbehalfofsomecreatortakesinformationfrom
itsenvironmentandiscapableofmakingindependentchoices.Wecould
describesomeautonomousagentsas“intelligent”althoughtheylackgeneral
intelligence.However,theyarenot“justcomputerprograms”becausetheycan
modifyhowtheyachievetheirobjectives.Theycansenseandrespondtotheir
environmentovertime.
10
Thecomputervirusisthemostcitedexampleofanautonomousagent;the
virussurvivesbyreplicatingitselffrommachinetomachinewithoutdeliberate
humanaction.Unleashingavirusontheblockchaincouldbemoredifficultand
certainlycostlybecauseitwouldlikelyhavetopaytheotherpartytointeract
withit,andthenetworkwouldquicklyidentifyitspublickey,crashits
reputationscore,ornotvalidateitstransactions.
Forpositiveblockchainexamples,considerthefollowing.Acloud
computingservicerentsprocessingpowerfromvarioussources,growingto
Amazon’ssizebymakingrentaldealswithothercomputersthathaveexcess
capacity.
11
Adriverlesscarownedbyacommunity,company,individual,or
perhapsitselfmovesaroundthecitypickingupanddroppingoffpassengersand
chargingthemappropriatefees.We’reinterestedinagentsthatcando
transactions,acquireresources,makepayments,orotherwiseproducevalueon
behalfoftheircreator.
VitalikButerin,whocreatedtheEthereumblockchain,hastheorizedabout
theseagentsanddevelopedataxonomytodescribetheirevolution.Atoneend
aresingle-functionagentslikevirusesthatgoaboutworkingtoachievetheir
limitedgoals.Nextuparemoreintelligentandversatileagents,say,aservice
thatwouldrentserversfromaspecificsetofproviderslikeAmazon.Amore
sophisticatedagentmightbeabletofigureouthowtorentaserverfromany
providerandthenuseanysearchenginetolocatenewWebsites.Anevenmore
capableagentcouldupgradeitsownsoftwareandadapttonewmodelsofserver
rentalsuchasofferingtopayendusersforrentaloftheirunusedcomputersor
disks.Thepenultimatestepconsistsofbeingabletodiscoverandenternew
industries,leadingintothenextevolutionofthespecies—fullartificial
intelligence.
12
Weathernet
Couldanautonomousagentuseblockchaintechnologytomakemoney
forecastingtheweather?Flash-forwardto2020.Thebestweatherforecasts
globallyarecomingfromanetworkofsmartdevicesthataremeasuringand
predictingtheweatherallaroundtheworld.Thatyear,anautonomousagent
namedBOBisreleasedontothisnetworktocollaboratewiththesedevicesto
createabusiness.Here’showBOBworks.
Distributedenvironmentalsensors(weatherNodes)onutilitypoles,in
people’sclothes,onroofsofbuildings,travelingincars,andlinkedtosatellites
areallconnectedinaglobalmeshnetwork.NoneedforanInternetservice
providerforconnectivity.Ratherthancommunicatingwithacentraldatabase,
theystoretheirdataonablockchain.
13
Manyaresolarpoweredandsothey
don’tneedtheelectricalgrid;theycaneffectivelyoperateindefinitely.
Theblockchainhandlesafewfunctions.First,itsettlespayments.Asan
incentive,eachweatherNodereceivesamicropaymenteverythirtysecondsfor
providingaccurateweathertelemetry(temperature,humidity,wind,etc.)ata
particularlocationintheworld.
TheblockchainalsostoresallweatherNodetransactions.EachweatherNode
signsallofitsdatawithitspublickeystoredontheblockchain.Apublickey
identifiestheweatherNodeandallowsotherentitiestodetermineitsreputation.
Whenthenodeproducesaccurateweatherdata,itsreputationisenhanced.Ifa
nodeisbrokenorcompromisedandproducesinaccuratedata,itlosesstatus.
Nodeswithlowreputationreceivelessbitcointhannodeswithhighreputation—
thebeneficiarybeingthecreatoroftheapp—whetheranindividual,company,or
cooperative.
Theblockchainalsoallowsdataprovidersanddataconsumerstoparticipate
peertopeeronasingle,opensystem,ratherthansubscribetodozensof
centralizedweatherservicesaroundtheworld,andprogramtheirsoftwareto
communicatewitheachoftheirapplicationprogramminginterfaces(APIs).
Withsmartcontractswecanhaveaglobal“WeatherDataMarketplaceDApp”
whereconsumersbidfordatainrealtimeandreceivethedatainauniversally
agreed-uponformat.Centralizeddataproviderscanditchtheirproprietary
systemsandindividualizedsalesefforts,andinsteadbecomedataprovidersfor
thegloballyaccessibleWeatherDataMarketplaceDApp.
WeatherDApp:SensorsLP
InthefirsteraoftheInternet,technicalinnovationoccurredonlyinthecenter;
centralizedutilitieslikeenergycompanies,cablecorporations,andcentralbanks
decidedwhentoupgradethenetwork,whentosupportnewfeatures,andwhom
togiveaccess.Innovationcouldn’toccuratthe“edges”(i.e.,individualsusing
thenetwork)becausetherulesandprotocolsofclosedsystemsmeantthatany
newtechnologiesdesignedtointeractwiththenetworkwouldneedthecentral
powerspermissiontooperateonit.
Butcentralpowersareinefficientbecausetheydon’tknowexactlywhatthe
marketwantsinrealtime.Theyhavetomakeeducatedguessesthatarealways
lessaccuratethanwhatreal-timemarketsdemand.Weendupwith
WeatherCorp,acentralizedservicethatinstallssensorsandputsupsatellitesso
thatitcansellsubscriptionstodatathatfewpeoplemaywant.
Theblockchainallowsanyentitytobecomeaweatherproviderorweather
dataconsumer,withverylowbarrierstoentry.JustbuyaweatherNode,putiton
yourroof,andconnectittotheGlobalWeatherDataMarketplaceDAppLP(for
linkedpeers)andyou’llstartearningincomerightaway.Andifyoucanrigyour
ownrooftopweatherNodethathappenstoprovidemoreaccuratedata,well,
goodforyou!Youinnovatedontheedge,andthemarketrewardsyouforit.The
incentivesforinnovationonopennetworksarealignedtoincreaseefficiency
betterthanclosednetworks.
DuelingBots
Whataboutconflictsofinterest?IftheweatherNodestartedexpandingits
capabilityandenteredthecropinsurancemarketplace,wouldn’tithave
cognitivedissonance?FarmerweatherNodeswanttoemphasizetheimpactof
droughts,andinsurerweatherNodesclaimdroughtsareminimal.Theowners
anddesignersofagentsneedtransparencyofoperations.Ifbotharefiltering
sensordatathroughabiasedscreen,thentheirrespectivereputationswilldrop.
VitalikButerinpointsoutthatautonomousagentsarechallengingtocreate,
becausetosurviveandsucceedtheyneedtobeabletonavigateina
complicated,rapidlychanging,orevenhostileenvironment.“IfaWebhosting
providerwantstobeunscrupulous,theymightspecificallylocateallinstancesof
theservice,andthenreplacethemwithnodesthatcheatinsomefashion;an
autonomousagentmustbeabletodetectsuchcheatingandremoveoratleast
neutralizecheatingnodesfromthesystem.”
14
Notethatautonomousagentsalsoseparatepersonhoodfromassetownership
andcontrol.Beforeblockchaintechnology,allassets—land,intellectual
property,money—requiredapersonorlegalorganizationofpeopletoownit.
AccordingtoAndreasAntonopoulos,cryptocurrenciescompletelyignore
personhood.“Awalletcouldbecontrolledbyapieceofsoftwarethathasno
ownershipandsoyouhavethepossibilityofcompletelyautonomoussoftware
agentsthatcontroltheirownmoney.”
15
AnautonomousagentcouldpayforitsownWebhostinganduse
evolutionaryalgorithmstospreadcopiesofitselfbymakingsmallchangesand
thenallowingthosecopiestosurvive.Eachcopycouldcontainnewcontentthat
itdiscoversorevencrowdsourcessomewhereontheInternet.Assomeofthese
copiesbecomeverysuccessful,theagentcouldselladsbacktousers,adrevenue
couldgointoabankaccountorpostedonasecureplaceontheblockchain,and
theagentcouldusethisgrowingrevenuetocrowdsourcemoreadcontentand
proliferateitself.Theagentwouldrepeatthecyclesothatappealingcontent
propagatesandhostsitselfsuccessfully,andunsuccessfulcontentbasicallydies
becauseitrunsoutofmoneytohostitself.
DISTRIBUTEDAUTONOMOUSENTERPRISES
WenowsuggestyoubuckleupinyourStarTrekcaptain’sseatforamoment.
ImagineBOB9000—asetofautonomousagentsthatcooperateinacomplex
blockchain-basedecosystemaccordingtoamissionstatementandrules.
Togethertheycreateasuiteofservicesthattheyselltohumansororganizations.
Humansanimatetheagents,endowingthemwithcomputingpowerandcapital
togoabouttheirwork.Theybuytheservicestheyneed,hirepeopleorrobots,
acquirepartnerresourcessuchasmanufacturingcapabilityandbrandingand
marketingexpertise,andadaptinrealtime.
Thisorganizationcouldhaveshareholders,possiblymillionsofthemwho
participatedinacrowdfundingcampaign.Theshareholdersprovideamission
statement,say,tomaximizeprofitlawfully,whiletreatingallstakeholderswith
integrity.Shareholderscouldalsovoteasrequiredtogoverntheentity.As
opposedtotraditionalorganizations,wherehumansmakealldecisions,inthe
ultimatedistributedorganizationmuchoftheday-to-daydecisionmakingcanbe
programmedintoclevercode.Intheory,atleast,theseentitiescanrunwith
minimalornotraditionalmanagementstructure,aseverythingandeveryone
worksaccordingtospecificrulesandprocedurescodedinsmartcontracts.There
wouldbenoovercompensatedCEO,management,orcorporatebureaucracy,
unlesstheentitydecidedtohireandbuildone.Therewouldbenoofficepolitics,
noredtape,noPeterPrincipleoftheDilbertianenterpriseatwork,because
technologyproviders,opensourcecommunities,orenterprisefounderswould
setthesoftware’sagendatoexecutespecificfunctions.
Anyhumanemployeesorpartnerorganizationswouldperformundersmart
contracts.Whentheydothejobasspecified,theyareinstantlypaid—perhaps
notbiweeklybutdaily,hourly,orinmicroseconds.Astheentitywouldn’t
necessarilyhaveananthropomorphicbody,employeesmightnotevenknowthat
algorithmsaremanagingthem.Buttheywouldknowtherulesandnormsfor
goodbehavior.Giventhatthesmartcontractcouldencodethecollective
knowledgeofmanagementscienceandthattheirassignmentsandperformance
metricswouldbetransparent,peoplecouldlovetowork.
Customerswouldprovidefeedbackthattheenterprisewouldapply
dispassionatelyandinstantlytocorrectcourse.Shareholderswouldreceive
dividends,perhapsfrequently,asreal-timeaccountingwouldobviatetheneed
foryear-endreports.Theorganizationwouldperformalltheseactivitiesunder
theguidanceandincorruptiblebusinessrulesthatareastransparentastheopen
sourcesoftwarethatitsfoundersusedtosetitinmotion.
Welcometotomorrow’sdistributedautonomousenterprise(DAE),powered
byblockchaintechnologyandcryptocurrencies,whereautonomousagentscan
self-aggregateintoradicallynewmodelsoftheenterprise.
Beforeyousaythatthisallsoundsimpractical,pointless,orsomethingfrom
sci-fi,considerthefollowing.Usingtokens,companiessuchasConsenSyshave
alreadyissuedsharesintheirfirms,stagingpublicofferingswithoutregulatory
oversight.Youcouldlegallyrecordtheownershipofprivatelyheldcorporations
andtransferthosesharestootherpersonsontheblockchain.Yourshare
certificatescanpaydividendsandconfervotingpower.Thatsaid,yournew
“blockcom”isdistributed;itdoesn’texistwithoutjurisdiction,butyour
shareholderscanliveanywhere.Imagineasimilarmechanismtoissuedebtin
theformofbonds,eitherprivatecorporatebondsorsovereignbonds,essentially
creatingabondmarket.Thesamelogicappliestocommodities—notthe
commodityitselfbutanotethatcorrespondstothecommodity,similartohow
theChicagoMercantileExchangeortheglobalgoldmarketwork.
Butdon’tthinkofsecuritiesasyoucurrentlyknowthem.Imagineaglobal
IPOwith100millionshareholderseachcontributingafewpennies.It’snot
unthinkablethatmanagementandgovernancecouldoccuronamassivescale,
withmillionsofpeoplehavingvotingshares.Atlast,investorsatthebottomof
thepyramidcouldparticipateandownsharesofawealth-creatingventure
anywhereintheworld.Intheoryatleast,wecoulddesignacorporationwithout
executives,onlyshareholders,money,andsoftware.Codeandalgorithmscould
replacealayerofrepresentatives(i.e.,theexecutiveboard),withshareholders
exertingcontroloverthatcode.Theopportunityforprosperityissignificant,
nothinglessthanthedemocratizationofownershipofwealth-creating
instruments.
Notpractical?Perhaps.Butconsiderthatentrepreneursarealreadyusing
scriptinglanguagessuchasEthereumtodesignsuchfunctionsforeventually
autonomousmodels.Alreadyinnovatorsareimplementingcodethatpermits
multisignaturecontroloverfunds.Throughcrowdfundingcampaigns,massesof
peoplearepurchasingequityincompanies.DAppsarealreadygivingwayto
autonomousagents.
Thiscompletelydistributedenterprisecouldhaveawalletthatrequires
thousandsofsignatoriestoachieveconsensusinordertospendmoneyonan
importanttransaction.Anyshareholdercouldsuggestarecipientforthatmoney,
marshalingconsensusaroundthattransaction.Astructurelikethiswouldhave
obviouschallenges.Forexample,mechanismswouldneedtobeinplaceto
quicklyachieveconsensus.Orwhoisresponsiblefortheoutcomeofthat
transaction?Ifyou’vecontributedoneten-thousandthofavote,whatisyour
legalresponsibilityandliability?Couldtherebeself-propagatingcriminalor
terroristorganizations?AndreasAntonopoulosisnotconcerned.Hebelievesthat
thenetworkwillmanagesuchdangers.“Makethistechnologyavailabletoseven
andahalfbillionpeople,7.499billionofthosewilluseitforgoodandthatgood
candeliverenormousbenefittosociety.”
16
THEBIGSEVEN:OPENNETWORKEDENTERPRISEBUSINESS
MODELS
Therearecountlessopportunitiestoconstructopennetworkedenterprisesthat
disruptordisplacetraditionalcentralizedmodels,potentiallyevolvinginto
nascentdistributedautonomousenterprises.Considerhowthedistributedmodel
willdisruptorreplacetheeightfunctionsoffinancialservices—everythingfrom
retailbankingandstockmarketstoinsurancecompaniesandaccountancies.
Incumbentandnewentriesalikecanconstructnewbusinessarchitecturesthat
caninnovatebetter,createbettervalueatlowercost,andshiftandenable
producerstoshareinthewealththeycreate.
Blockchaintechnologytakessomeofthenewbusinessmodelsdescribedin
Wikinomicstoanewlevel.
17
Let’slookathowwecanexpandpeerproduction,
ideagoras,prosumers,openplatforms,thenewpowerofthecommons,the
globalplantfloor,andthewiki(social)workplacebyaddinginnativepayment
systems,reputationsystems,uncensorablecontent,trustlesstransactions,smart
contracts,andautonomousagents—thekeyinnovationsoftheblockchain
revolution.
1.ThePeerProducers
Peerproducersarethethousandsofdispersedvolunteerswhobroughtyouopen
sourcesoftwareandWikipedia,innovativeprojectsthatoutperformthoseofthe
largestandbest-financedenterprises.Communitymembersparticipateforthe
funofit,asahobby,tonetwork,orbecauseoftheirvalues.Now,byenabling
reputationsystemsandotherincentives,blockchaintechnologycanimprove
theirefficiencyandrewardthemforthevaluetheycreate.
Peerproductioncommunitiescanbe“commons-basedpeerproduction,”a
phrasecoinedbyHarvardLawprofessorYochaiBenkler.
18
Sometimescalled
socialproduction,alsoBenklersterm,thissystemmeansthatgoodsand
servicesareproducedoutsidetheboundsoftheprivatesectorandarenot
“owned”byacorporationorindividual.Amongthecountlessexamplesarethe
Linuxoperatingsystem(ownedbynoonebutnowthemostimportantoperating
systemintheworld),Wikipedia(ownedbytheWikimediaFoundation),andthe
FirefoxWebbrowser(ownedbytheMozillaFoundation).Peerproductioncan
alsorefertoactivitiesintheprivatesectorwherepeerscollaboratesociallyto
producesomethingbutthegoodisnotsociallyowned.
Peerproductionasabusinessmodelmattersfortworeasons.First,
sometimespeerscollaboratevoluntarilytoproducegoodsandserviceswherea
corporationactsascuratorandachievescommercialbenefit.Readerscreatethe
contentontheRedditdiscussionplatform,buttheydon’townit.Redditisthe
tenth-biggestsiteintheUnitedStatesintermsoftraffic.Second,companiescan
tapintovastpoolsofexternallabor.IBMembracedLinuxanddonatedhundreds
ofmillionsofdollars’worthofsoftwaretotheLinuxcommunity.Indoingso,
IBMsaved$900millionayeardevelopingitsownproprietarysystemsand
createdaplatformonwhichitbuiltamultibillion-dollarsoftwareandservices
business.
Experienceshowsthatlong-termsustainabilityofvolunteercommunities
canbechallenging.Infact,someofthemoresuccessfulcommunitieshave
foundwaystocompensatemembersfortheirhardwork.AsSteveWozniaksaid
toStewartBrand,“Informationshouldbefree,butyourtimeshouldnot.”
19
InthecaseofLinux,mostoftheparticipantsgetpaidbycompanieslike
IBMorGoogletoensurethatLinuxmeetstheirstrategicneeds.Linuxisstillan
exampleofsocialproduction.Benklertoldus,“Thefactthatsomedevelopers
arepaidbythirdpartiestoparticipatedoesnotchangethegovernancemodelof
Linux,orthefactthatitissociallydeveloped.”Thisismorethanso-calledopen
innovationthatinvolvescooperationbetweenfirmsandsharingcertain
intellectualproperty,hesaid.“Thereisstillsubstantialsocialmotivationfor
manycontributorsandassuchit’sahybridmodel.”
20
Further,manyofthesecommunitiesareplaguedwithbadbehavior,
incompetence,saboteurs,andtrolls—peoplewhosowdiscordbyposting
inflammatory,incorrect,oroff-topicmessagestodisruptthecommunity.
Reputationinthesecommunitiesistypicallyveryinformal,andthereisno
economicincentiveforgoodbehavior.
Withblockchaintechnologypeerscandevelopmoreformalreputationsfor
effectivecontributionstothecommunity.Todiscouragebadbehavior,members
couldanteupasmallamountofmoneythateitherincreasesordecreasesbased
oncontribution.Incorporate-ownedcommunities,peerscouldshareinthevalue
theycreateandreceivepaymentfortheircontributionsassmartcontractsdrop
transactioncostsandopenupthewallsofthefirm.
ConsiderReddit.Thecommunityhasrevoltedovercentralizedcontrolbut
stillsuffersfromflippant,abrasivemembers.Redditcouldbenefitfrommoving
toamoredistributedmodelthatrewardsgreatcontributors.ConsenSysis
alreadyworkingonablockchainalternativetoRedditthatdoesjustthat.By
offeringfinancialincentives,theConsenSysteamthinksitcanimprovethe
qualityofRedditlikeconversations,withoutcentralizedcontrolandcensorship.
TheEthereumplatformprovidesincentives,perhapsinrealtime,toproduce
high-qualitycontentandbehavecivillywhilecontributingtocollective
understanding.
Reddithasasysteminplace,calledReddit“Gold”—atokenthatuserscan
buyandthenusetorewardpeoplewhosecontributionstheyvalue.Themoney
fromtokensgoestositemaintenance.Thegoldhasnointrinsicvaluetousers.
Sowithareal,transferable,blockchain-basedcoinincentive,Redditmembers
couldactuallybegintogetpaidformakingthesitemorerobust.
Wikipedia,theflagshipofsocialproduction,couldbenefitaswell.Right
nowallpersonswhoeditarticlesdevelopaninformalreputationbasedonhow
manypiecestheyhaveeditedandhoweffectivetheyare,asmeasuredbyhighly
subjectiveterms.TheWikipediacommunitydebatesconstantlyoverincentive
systems,butadministeringsomekindoffinancialcompensationtoseventy
thousandvolunteershasn’tbeenfeasible.
WhatifWikipediawentontheblockchain—callitBlockapedia.Inaddition
tothebenefitsofentriestime-stampedintoanimmutableledger,therecouldbe
moreformalmeasuresofone’sreputationthatcouldhelpincentgoodbehavior
andaccuratecontributions.Sponsorscouldfund,oralleditorscouldcontribute
moneyto,anescrowaccount.Eacheditorcouldhaveareputationlinkedtothe
valueofheraccount.Ifshetriedtocorruptanarticle,statingforexamplethat
theHolocaustneverhappened,thevalueofherdepositwoulddecline,andin
casesofdefamationorinvasionofprivacy,shewouldloseitandevenfacecivil
orcriminalaction.ThetrueeventsoftheSecondWorldWarcouldbeestablished
inmanyways,forexample,byaccessingunchangeablefactsontheblockchain
orthroughalgorithmsthatshowconsensusregardingthetruth.
ThesizeofyourBlockapediasecuritydepositcouldbeproportionaltoyour
previousreputationonWikipediaorsimilarplatforms.Ifyou’reabrand-new
userandhavenoreputation,you’llputupalargersecuritydeposittoparticipate.
Ifyou’veedited,say,twohundredarticlesonWikipediasuccessfully,your
depositmightbesmall.
ThisisnotnecessarilyaboutmovingWikipediatoafor-hirecompensation
model.“It’ssimplyacaseofprovidingreal-worldeconomicgainorloss
dependingontheaccuracyandveracityoftheinformationyou’reproviding,”
21
saidDinoMarkAngaritis,CEOoftheblockchain-basedSmartwallet.Defacing
Blockapediahurtsyourformalreputationbutyoualsolosemoney.
ButWikipediaworksprettywellrightnow,right?Notquite.AndrewLih,
writinginTheNewYorkTimes,pointedoutthat,in2005,thereweremonths
whenmorethansixtyeditorsweremadeadministrator,apositionwithspecial
privilegesineditingtheEnglish-languageedition.In2015,thesitehasstruggled
topromoteevenoneeditorpermonth.Beingavoluntaryglobalorganization,
thereareinternaltensions.Worse,editingcontentonamobiledeviceisdifficult.
“ThepoolofpotentialWikipediaeditorscoulddryupasthenumberofmobile
userskeepsgrowing.”LihconcludesthatthedemiseofWikipediawouldbe
unfortunate.“Noeffortinhistoryhasgottensomuchinformationatsolittlecost
intothehandsofsomany—afeatmadeallthemoreremarkablebytheabsence
ofprofitandowners.InanageofInternetgiants,thismostselflessofwebsitesis
worthsaving.”
22
Overall,peerproductioncommunitiesareattheheartofnew,networked
modelsofvaluecreation.Inmostindustries,innovationincreasinglydependson
densenetworksofpublicandprivateparticipantsandlargepoolsoftalentand
intellectualpropertythatroutinelycombinetocreateendproducts.AsIBM
embracedLinux,firmscaneventieintoself-organizingnetworksofvalue
creatorsliketheopensourcemovementtococreateorpeer-producevalue.
2.TheRightsCreators
DuringthefirstgenerationoftheInternet,manycreatorsofintellectualproperty
didnotreceivepropercompensationforit.Musicians,playwrights,journalists,
photographers,artists,fashiondesigners,scientists,architects,andengineersall
werebeholdentorecordlabels,publishers,galleries,filmstudios,universities,
andlargecorporationsthatinsistedtheseinventorsassigntheirintellectual
propertyrightstowhatessentiallyarelargerightsmanagementoperationsin
exchangeforlessandlessoftheirIP’svalue.
Blockchaintechnologyprovidesanewplatformforcreatorsofintellectual
propertytogetvalueforit.Considerthedigitalregistryofartwork,includingthe
certificatesofauthenticity,condition,andownership.Anewstart-up,Ascribe,
enablesartiststhemselvestouploaddigitalart,watermarkitasthedefinitive
version,andtransferitsothat,likebitcoin,itmovesfromoneperson’scollection
toanothers.That’shuge.Thetechnologysolvestheintellectualpropertyworld’s
equivalentofthedouble-spendproblembetterthanexistingdigitalrights
managementsystems,andartistscoulddecidewhether,when,andwherethey
wantedtodeployit.
MemeartistRonenVsaid,“Artisacurrency.Theevolutionofartinto
digitalcurrencyis—noquestion—thefuture.Andthisisagoodstep.”
23
Musicians,photographers,designers,illustrators,orotherartistswhosework
couldbedigitizedandwatermarkedasadefinitivecopycouldusethis
technologytotransformtheirintellectualpropertyintoatradableasset,alimited
editionperhapscustomizedforaparticularfan.Artistsandmuseumscanuse
Ascribe’stechnologytoloanpiecestootherindividualsorinstitutions.
24
Monegraphoffersasimilarservice:itusesdigitalwatermarksandthe
cryptographyintrinsictotheblockchainforauthenticatingpieces.Artistssimply
uploadthearttoapageontheInternetandsubmittheURLtoMonegraph.The
firmissuesasetofpublicandprivatekeys,exceptthatthevalueassociatedwith
thepublickeyisadigitaldeedtotheartratherthanbitcoinperse.Monegraph
alsotweetsapublicannouncementofthedeed,noteworthybecausetheU.S.
LibraryofCongressarchivespublicTwitterfeeds.
25
Someoneelsemighttryto
claimtheURLashisown,buttherewouldalreadybeatleasttwoproofsinthe
publicrecordtoverifyownership.
26
Verisart,aLosAngeles–basedstart-upwithbitcoincoredeveloperPeter
Toddasanadviser,hasevengreaterambitions.Certifyingtheauthenticityand
theconditionofapieceoffineartisbigbusiness,andonethatislargelypaper
basedandcontrolledbyeliteexpertswithaccesstorestricteddatabases.Finding
whoownstheart,whereit’sstored,andinwhatconditionisarealchallenge,
evenforthosewhoactuallyknowwhatthey’relookingfor.Verisartis
combiningblockchaintechnologyandstandardmuseummetadatatocreatea
publicdatabaseofartandcollectibles.Thisworldwideledgerwillserveartists,
collectors,curators,historians,artappraisers,andinsurersanywhereinthe
world.
27
Byusingthebitcoinblockchain,Verisartcanconferdigitalprovenance
toanyphysicalwork,notjustdigitalart,anduserswillbeabletocheckawork’s
authenticity,condition,andchainoftitlefromtheirmobiledevicebeforethey
participateinanonlineauctionoragreetoasale.“Webelievetechnologycan
aidtrustandliquidity,especiallyasmoreofthe$67billionannualartmarket
shiftstoprivatesales(peer-to-peer)andonlinetransactions,”founderRobert
NortontoldTechCrunch.“Theartworldisnotbroken.Itjustreliestoomuchon
middlementoensuretrustandliquidity.Webelievetheadventofadecentralized
world-wideledgercoupledwithpowerfulencryptiontomasktheidentitiesof
buyerandsellerwillbeattractivetotheartworld.”
28
Theartistbecomeswhat
couldbecalleda“rightsmonetizer”withthetechnologymakingdealsand
collectingrevenueinrealtime.
Youcouldapplythissamemodeltootherfieldsaswell.Inscience,a
researchercouldpublishapapertoalimitedaudienceofpeers,asSatoshi
Nakamotodid,andreceivereviewsandthecredibilitytopublishtoalarger
audience,ratherthanassigningallrightstoascientificjournal.Thepapermight
evenbeavailableforfreebutotherscientistscouldsubscribetoadeeper
analysisorthreadeddiscussionswiththeauthoraboutit.Shecouldmakeher
rawdataavailableorperhapssharedatawithotherscientistsaspartofasmart
contract.Ifthereisacommercialopportunityflowingfromthepaper,therights
couldallbeprotectedinadvance.Moreonthisinchapter9.
3.BlockchainCooperatives
Thetrustprotocolsuperchargescooperatives—autonomousassociationsformed
andcontrolledbypeoplewhocometogethertomeetcommonneeds.
“It’snonsensetocallUberasharingeconomycompany,”saidHarvard
professorBenkler.“Uberhasusedtheavailabilityofmobiletechnologytocreate
abusinessthatlowersthecostoftransportationforconsumers.That’sallithas
done.”
29
DavidTicollsaid,“IncommonEnglishusage,sharingdenotesfree
exchange—notfinancialtransactions.Asinkids’sharingtoys.It’sashamethat
thistermhassomewhatlostthatmeaning.”Tohim,“sharingisthemainway
thathumansandmembersofotherspecieshaveconductedexchangeswithone
anotherformillionsofyears,beginningwiththeactofconceptionitself.While
someInternetcompanieshavefacilitatedgenuinesharing,othershave
appropriatedandcommoditizedthesocialrelationshipsandvocabularyof
sharing.”
30
Mostso-calledsharingeconomycompaniesarereallyserviceaggregators.
Theyaggregatethewillingnessofsupplierstoselltheirexcesscapacity(cars,
equipment,vacantrooms,handymanskills)throughacentralizedplatformand
thenresellthem,allwhilecollectingvaluabledataforfurthercommercial
exploitation.
CompanieslikeUberhavecrackedthecodeforlarge-scaleservice
aggregationanddistribution.Airbnbcompeteswithhotelsontravel
accommodations;LyftandUberchallengetaxiandlimousinecompanies;Zipcar,
beforeitwaspurchasedbyAvis,challengedtraditionalcarrentalcompanies
withitshipconvenienceandconvenienthourlyrentals.
Manyofthesecompanieshaveglobalizedthemerchandisingoftraditional
local,small-scaleservices—likebed-and-breakfasts,taxis,andhandypersons.
Theyusedigitaltechnologiestotapintoso-calledunderutilized,time-based
resourceslikerealestate(apartmentbedrooms),vehicles(between-calltaxis),
andpeople(retireesandcapablepeoplewhocan’tgetfull-timejobs).
Blockchaintechnologyprovidessuppliersoftheseservicesameansto
collaboratethatdeliversagreatershareofthevaluetothem.ForBenkler,
“Blockchainenablespeopletotranslatetheirwillingnesstoworktogetherintoa
setofreliableaccounting—ofrights,assets,deeds,contributions,uses—that
displacessomeofwhatacompanylikeUberdoes.Sothatifdriverswanttoset
uptheirownUberandreplaceUberwithapurecooperative,blockchainenables
that.”Heemphasizedthewordenable.Tohim,“There’sadifferencebetween
enablingandmovingtheworldinanewdirection.”Hesaid,“Peoplestillhaveto
wanttodoit,totaketheriskofdoingit.”
31
SogetreadyforblockchainAirbnb,blockchainUber,blockchainLyft,
blockchainTaskRabbit,andblockchaineverythingwhereverthereisan
opportunityforrealsharingandforvaluecreationtoworktogetherina
cooperativewayandreceivemostofthevaluetheycreate.
4.TheMeteringEconomy
Perhapsblockchaintechnologycantakeusbeyondthesharingeconomyintoa
meteringeconomywherewecanrentoutandmetertheuseofourexcess
capacity.Oneproblemwiththeactualsharingeconomy,where,forexample,
homeownersagreetosharepowertoolsorsmallfarmingequipment,fishing
gear,awoodworkingshop,garageorparking,andmore,wasthatitwasjusttoo
muchofahassle.“Thereare80millionpowerdrillsinAmericathatareusedan
averageof13minutes,”AirbnbCEOBrianCheskywroteinTheNewYork
Times.“Doeseveryonereallyneedtheirowndrill?”
32
Thetroubleis,mostpeoplefounditeasierandmorecost-effectivetomake
onetriptoHomeDepotandbuyadrillfor$14.95thanrentitfor$10from
someoneamileaway,makingtwotrips.WroteSarahKesslerinFastCompany
magazine:“TheSharingEconomyisdeadandwekilledit.”
33
Butwithblockchainswecanrentourexcesscapacityforcertain
commoditiesthatareprettymuchzerohassle—Wi-Fihotspots,computing
powerorstoragecapacity,theheatgeneratedbyourcomputers,ourextramobile
minutes,evenourexpertise—withoutliftingafinger,letaloneschleppingtoand
fromsomestrangershouseacrossthecity.Whenyoutravel,yourWi-Ficanrent
outitselfinyourabsence,chargingfractionsofpenniesforeverysecondof
usage.Yourimagination(andpossiblynewregulation)isyouronlylimit.Your
subscriptions,physicalspace,andenergysourcescannowbecomesourcesof
income,meteringtheirusedirectlytoacounterpartyandchargingthemforit
throughmicropayments.Allyouneedisadecentralizedvaluetransferprotocol
toallowthemtosafelyandsecurelytransactwithoneanother.Theseplatforms
instillsubsidiaryrightsinallourassets.Youneedtodecidetheextenttowhich
youwanttoassignothersusageandaccessrights—eventherighttoexclude
othersfromusingyourassets—andwhattochargeforthoserights.
Thiscanworkforphysicalassetstoo.Forexample,we’veheardalotabout
autonomousvehicles.Wecanbuildanopentransportationnetworkonthe
blockchainwhereownerseachhaveaprivateencryptedkey(number)thatlets
themreserveacar.Usingthepublickeyinfrastructureandexistingblockchain
technologieslikeEtherLockandAirlock,theycanunlockandusethecarfora
certainamountoftime,asspecifiedbytherulesofthesmartcontract—allthe
whilepayingthevehicle(oritsowners)inrealtimeforthetimeandenergythat
theyuse—asmeteredonablockchain.Becauseblockchaintechnologyis
transparent,thegroupofownerscantrackwhoisabidingbytheircommitments.
Thosewhoaren’ttakeareputationalhitandeventuallyloseaccessaltogether.
5.ThePlatformBuilders
Enterprisescreateplatformswhentheyopenuptheirproductsandtechnology
infrastructurestooutsideindividualsorcommunitiesthatcancocreatevalueor
newbusinesses.Onetypeisprosumers,customerswhoproduce.
34
Inadynamic
worldofcustomerinnovation,anewgenerationofproducer-consumers
considersthe“righttohack”itsbirthright.Blockchaintechnologysupercharges
prosumption.Nikerunningshoescouldgenerateandstoredataonadistributed
ledgerthat,inturn,Nikeandtheshoewearercouldmonetizeasagreedintheir
smartcontract.Nikecouldofferatinypieceofitsshareswitheverypairitsells,
ifthecustomeragreestoactivatethesmartsintheshoes,orevensynchershoes
tootherwearables,suchasaheartmonitororglucoselevelcalculatororother
valuabledataforNike.
Someplatformsdifferfromprosumercommunitieswhereacompany
decidestococreateproductswithitscustomers.Withopenplatforms,acompany
offerspartnersabroadervenueforstagingnewbusinessesorsimplyadding
valuetotheplatform.
Nowwithblockchaintechnologycompaniescanquicklycreateplatforms
andpartnerwithotherstocreateplatformsorutilitiesforanentireindustry.
RobinChasefoundedZipcar(aserviceaggregator)aswellasBuzzcar(userscan
sharetheircarswithothers),andisnowtheauthorofPeersInc.,alucidbookon
thepowerofpeersworkingtogether.Shetoldus,“Leveragingthevaluefoundin
excesscapacitydependsonhigh-qualityplatformsforparticipation.These
platformsdon’tcomecheap.Theblockchainexcelsinprovidingastandard
commondatabase(openAPIs)andstandardcommoncontracts.Theblockchain
canmakeplatformbuildingcheaperandmanageable.”That’sjustthebeginning.
“Bestofall,itscommondatabasemakesfordatatransparencyandportability:
consumersandsupplierscanpursuethebestterms.Theycanalsocooperateas
peersontheblockchaintocreatetheirownplatforms,ratherthanusingthe
capabilitiesoftraditionalcompanies.”
35
Thinkofthecarofthefutureitself.Itwouldexistaspartofablockchain-
basednetworkwhereeveryonecanshareinformation,andvariouspartsofthe
vehiclecandotransactionsandexchangemoney.Givensuchanopenplatform,
thousandsofprogrammersandnichebusinessescouldcustomizeapplications
foryourcar.Soonsuchplatformscouldtransformentireindustriessuchas
financialservicesbysettlingallkindsoffinancialtransactionsandexchangesof
value.Aconsortiumofthelargestbanksisalreadyworkingontheidea.
Platformsaretherisingtidethatliftsallboats.
Wikinomicsintroducedtheconceptofideagoras—emergingmarketplacesfor
ideas,inventions,anduniquelyqualifiedminds,whichenabledcompanieslike
P&Gtotapglobalpoolsofhighlyskilledtalentmorethantentimesthesizeof
itsownworkforce.FirmsuseserviceslikeInnoCentiveandInno360tofacilitate
holding“Challenges,”“DigitalBrainstorms,”andothertechniquestofindthe
righttemporarytalentoutsidetheirboundariestoaddresscriticalbusiness
challenges.It’saboutusingdatatofindtherighttalenttohackyourbusinessfor
thebetter.
Talent—theuniquelyqualifiedmindstosolveproblems—canposttheir
availabilitytotheledgersothatfirmscanfindthem.RatherthanInnoCentive,
thinkbInnoCentive.Individualscancultivatenotonlyaportableidentity,but
alsoaportablerésumé(anextendedversionoftheiridentity)thatcanprovide
appropriateinformationaboutthemtopotentialcontractors.Thinkadistributed
skillsinventoryownedbynooneoreveryone.
Aseverybusinessbecomesadigitalbusiness,thehackathonisanimportant
formofideagora.Nowwithblockchaintechnologyandopensourcecode
repositories,everycompanycouldprovidevenuestogeeksandotherbusiness
buildersforproblemsolving,innovating,andcreationofnewbusinessvalue.
Blockchainsandblockchain-basedsoftwarerepositorieswillfuelsuch
activity.Companiescannowusepowerfulnewprogramminglanguageslikethe
Ethereumblockchainwithbuilt-inpaymentsystems.Anexcerptfroma
conversationonHackerNews:“ImaginehowcoolitwouldbeifIcouldsharea
guidformyrepo—andthenyourbitclient(let’scallitgitcoin,ormaybejustbit)
canfetchnewcommitsfromadistributedblockchain(essentiallythegitlog).
Githubisnolongeranintermediaryorasinglepointoffailure.Privaterepo?
Don’tsharetheguid.”
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Howcoolindeed!(Well,maybeyoudidn’tunderstandoneiotaofthatlittle
pieceofcoolness,butyouprobablygettheidea.)
6.BlockchainMakers
Manufacturing-intensiveindustriescangiverisetoplanetaryecosystemsfor
sourcing,designing,andbuildingphysicalgoods,markinganewphaseofpeer
production.It’saboutmakingitontheblockchain.Justasamodernaircrafthas
beendescribedas“abunchofpartsflyinginformation,”companiesinmost
industriesaretendingtodisaggregateintonetworksofsuppliersandpartners.
Three-dimensionalprintingwillmovemanufacturingclosertotheuser,bringing
newlifetomasscustomization.Soon,dataandrightsholderscanstoremetadata
aboutanysubstancefromhumancellstopoweredaluminumontheblockchain,
inturnopeningupthelimitsofcorporatemanufacturing.
Thistechnologyisalsoapowerfulmonitoroftheprovenanceofgoodsand
theirmovementthroughoutasupplynetwork.Consideranindustryclosetoall
ourhearts(andotherbodyparts)—thefoodindustry.Todayyourlocalgrocery
storemayclaim—andtrulybelieve—thatitsbeefissafe,raisedhumanely,fed
qualityingredients,andgivennounnecessarydrugs.Butitcan’tguaranteeit.No
onekeepshistoriesofsinglecows;badthingshappentogoodbovines.Wetrust
ourhamburgerwithnomeanstoverify.Usuallyitmakesnodifference;billions
andbillionskeepgettingserved.Butonceinawhile,wegetaglimpseofmad
cowdisease.
Thefoodindustrycouldstoreontheblockchainnotjustthenumberofevery
steer,butofeverycutofmeat,potentiallylinkedtoitsDNA.Three-dimensional
searchabilitiescouldenablecomprehensivetrackingoflivestockandpoultryso
thatuserscouldlinkananimal’sidentitytoitshistory.Usingsophisticated(but
relativelysimpletouse)DNA-basedtechnologiesandsmartdatabase
management,eventhelargestmeatproducerscouldguaranteequalityandsafety.
Imaginehowthesedatamightexpeditelabtestsandacommunityhealth
responsetoacrisis.
Knowinghowourfoodwasraisedorgrownisnotaradicalidea.Our
ancestorsboughtsuppliesatlocalmarketsorfromretailerswhosourced
productslocally.Iftheydidn’tlikehowalocalranchertreatedhiscattle,they
didn’tbuyhisbeef.Buttransportationandrefrigerationhaveestrangedusfrom
ourfoodstuffs.We’velostthevaluesoftheoldfoodchain.
Wecouldrestorethesevalues.Wecouldleadtheworldindevelopinga
modern,industrialized,openfoodsystemwithdown-to-earthfamilyfarm
values.Transparencyletscompanieswithsuperiorpracticesdifferentiate
themselves.Thebrandcouldevolvefromthemarketingnotionofatrustmark—
somethingthatcustomersbelieveinbecauseit’sfamiliar—intoarelationship
basedontransparency.Surelyfoodproducershaveanappetiteforthat.
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7.TheEnterpriseCollaborators
YochaiBenklerspokeabouthowblockchaintechnologycouldfacilitatepeer-to-
peercollaborationwithinfirms,andbetweenfirmsandpeersofallsorts.“I’m
excitedabouttheideathatyouhaveafullydistributedmechanismfor
accounting,foractions,andfordigitalresourcesacrossanything;whetherit’s
currency,whetherit’ssocialrelationsandexchange,orwhetheritsan
organization.”
38
Today,commercialcollaborationtoolsarebeginningtochangethenatureof
knowledgeworkandmanagementinsideorganizations.
39
ProductslikeJive,
IBMConnections,SalesforceChatter,CiscoQuad,MicrosoftYammer,Google
AppsforWork,andFacebookatWorkarebeingusedtoimproveperformance
andfosterinnovation.Socialsoftwarewillbecomeavitaltoolfortransforming
virtuallyeverypartofbusinessoperations,fromproductdevelopmenttohuman
resources,marketing,customerservice,andsales—inasensethenewoperating
systemforthetwenty-first-centuryorganization.
Butthereareclearlimitationstotoday’ssuitesoftools,andtheblockchain
takesthesetechnologiestothenextlevel.Existingvendorswilleitherface
disruptionorembraceblockchaintechnologiestodelivermuchdeepercapability
totheircustomers.
Whatwouldablockchainsocialnetworkforthefirmlooklike?Think
Facebookforthecorporation(orsimplyanalternativetoFacebookforyou).
Becauseseveralcompaniesareworkingonthis,wecanflash-forwardayearor
twoandhere’swhatweget:
Everyuserhasamultifacetedwallet,asortofportalintothedecentralized
onlineworld.Thinkaportablepersonalprofile,apersonaoridentitythatyou
own.UnlikeyourFacebookprofile,thewallethasdiversefunctionsandstores
manykindsofpersonalandprofessionaldataandvaluablesincludingmoney.It
isalsoprivatetoyouandyoushareonlywhatyouwant.Youhavepairsof
public-privatekeysthatservetoanchoryourpersistentdigitalID.While
multiplepersonascanbehousedinthewalletforeachpersonorcompany,let’s
assumethatawalletholdsasinglecanonicalpersonaanchoredinasinglekey
pair.Apublishingsystemdeliversastreamofinformationthatyouoryourfirm
willhappilypayfor—acolleague’spatchofnewcode,asummaryofa
conversationwithanewclient,or—withtheclient’spermission—atape
recordingofacall,aTwitterfeedfromaconferencethatyoucouldn’tattend,
livestreamofaclient’suseofyournewproduct,photographsofyour
competitors’boothsatanindustryexpo,aPrezipresentationthatseemstobe
closingnewbusiness,avideohow-toofsomethingacolleaguejustinvented,
assistanceincompletingapatentapplication,oranythingelsethatyouvalue.
Thereisadvertising,perhapsfromthirdpartiesormaybefromtheHR
departmentaboutopenenrollmentorchangesininsuranceplans,butyou,not
Facebook,getrevenueorsomerewardforpayingattention.Thisiscalledan
“attentionmarket.”Youcouldreceivemicrocompensationforagreeingtoview
orinteractwithanadvertisement,orforfeedingbackindetailaboutanew
productpitch,orjustaboutanythingelse,suchastranscribingCAPTCHAs
40
or
scanneddocuments.
Thenewsstream,publishingsystem,andtheattentionmarketalllook
similar,butpaymentsflowdifferentlyforeach.SaidConsenSys’sJoeLubin,
“Youpayforpublishing.Companiespayforyourattention.Thenewsstreamhas
nopaymentflow.Iamhappytoreadyourstream,becauseIvaluethatsocial
connection,butIamnotgoingtopaytoseeapictureofyouandyourbuddies
drinkingatabar,ortoreadyouropinionontheBlueJayspitchingstaff.”
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Youalsoparticipateinorcreatetopicaldiscussionchannels,whereyou
configureyourprivacy.Privacyisenhancedinothermannerstoo.Forexample,
spyagenciescan’tconducttrafficanalysisbecausetheyareunabletodiscernthe
sourceordestinationofmessages.
Therewouldalsobeaniftymechanismforfindingpeopleandfeedsthatyou
mightcareabout.Inaddition,distributedtoolsaggregateandpresentinteresting
newpeopleorinformationforyoutofolloworfriend,possiblyusingFacebook’s
socialgraphtohelpout.Lubincallsthis“bootstrappingthedecentralizedWeb
usingthepillarsofthecentralizedWeb.”
42
Experienceshowsthatvalueultimatelywinsoutinthedigitalage.The
benefitsofthisdistributedmodelarehuge—atleasttotheusersandcompanies.
Thehugeresourcesofsocialmediacompaniesnotwithstanding,thereisnoend
totherichnessandfunctionalitythatwecandevelopinsuchanopensource
environment.ComparethepowerandsuccessofLinuxversusproprietary
operatingsystems.Blockchaintechnologiesensuresecurity.Yourprivacyis
completelyconfigurable.Nosocialmediacompanycansellorleakyour
personalinformationtogovernmentagencieswithoutyourpermission.Ifyou’re
adissidentinatotalitariancountry,noonecantrackwhatyouhavereadorsaid
online.Becauseyouownyourdata,youcanmonetizeitalongwithyour
attentionandefforts.Youshareinthewealthofbigdata.
Companiestooshouldbeenthusiasticabouttheiremployees’usingsuch
platformsforbusiness.Toattracttalent,firmsneedtoshowintegrityandrespect
theiremployees’securityandprivacy.Moreimportant,asanyfirmworksto
becomenetworked,approachingtalentoutsideitsboundaries,theycanofferup
suchinterenterprisecollaborativeplatformsthattheirpartnerscantrust.Time
willtell.
Insummary,thesearesevenoftheemergingbusinessmodelswherebyboth
companieslargeandsmallcanmakeit“rainontheblockchain.”Overall,the
opennetworkedenterpriseshowsprofound,evenradicalpotentialtosupercharge
innovationandharnessextraordinarycapabilitytocreategoodvaluefor
shareholders,customers,andsocietiesasawhole.
HACKINGYOURFUTURE:BUSINESSMODELINNOVATION
Asforacompanymanagedbysoftwareagents,RonaldCoasemustbehigh-
fivinguptheresomewhereinEconomists’Heaven(althoughsomemightdispute
thatsuchaplaceexists).RememberthereverseofCoase’slaw?Acorporation
shouldshrinkuntilthecostsoftransactionsinsidearelessthanthecostsof
transactionsoutsideitsboundaries.Astechnologycontinuestodropcostsinthe
market,it’sconceivablethatcorporationscouldandshouldhaveverylittleinside
—exceptsoftwareandcapital.
Thinkaboutit.
Tobegin,thecostof“search”continuestodropasnewagentshavethe
abilitytoconductthree-dimensionalsearchesoftheWorldWideLedgerof
everythingcommercialthatexistsorhasexisted.Sononeedforacorporate
library,informationspecialists,HRsearchspecialists,orthemyriadother
professionalsinvolvedinacquiringpertinentinformationtorunabusiness.
Second,smartcontractswouldradicallyreducethecostsofcontracting,
policingcontracts,andmakingpayments.Nolongerpaper,theseprogramscould
formulatetheirtermsthroughaseriesoftemplates;bargain,acceptingor
rejectingtermsandconditionsbasedonrulesandextensiveinformation
collectedfromexternalsources;formulateself-enforcingpolicies;determine
whenperformanceconditionshavebeenmet;andexecutetransactions.
Third,thecostofcoordinationofalltheseresourcesoutsidetheorganization
couldbetrivial—measuredintheenergytopowertheservershostingthe
enterprisesoftware.Asformanaginghumans,organizations,andfactorieshired
bytheenterprise,theenterprisehasnoneedforbureaucracy.Withthenew
platformwecanimagineaneworganizationthatrequireslittleornotraditional
managementorhierarchytogeneratecustomervalueandownerwealth.
Finally,thecostsofestablishingtrustwouldapproximatezero.Trustdoes
notrestwiththeorganization,butratherwithinthefunctionality,security,and
auditabilityoftheunderlyingcodeandthemasscollaborationofthecountless
peoplesecuringtheblockchain.
Howwouldyougoaboutdesigningadistributedautonomousenterprise?
Suchanentitycouldhaverichfunctionality—agentsexecutingrangesoftasksor
morebroadlybusinessfunctionsallbasedonapreapprovedcharter.Individuals,
organizations,orcollectivesofpotentialshareholdersoruserswilldesignthem
bydefiningthefollowing:
1.Conviction:abeliefabouttheworldandwhatneedstobedoneto
createvalueorchangethings.
2.Purpose:itsreasonforexistence.Whyarewecreatingthisenterprise
inthefirstplace?
3.Constitution:outlinestheoverallobjectivesoftheenterpriseandthe
rulesbywhichitwillcreatevalue.
4.Modusoperandi:forexample,howitwillgoaboutcreatingthisvalue.
Howitwillfunditself—throughcrowdfunding,traditionalearly-stage
investment,orusingrevenue.Howitwillacquireresources.
5.Divisionoflaborbetweenhumansandtechnology:fortheforeseeable
future,perhapshumansshouldbeincharge.
6.Applicationfunctions:howtheenterprisewillsenseandrespondto
changingconditions.
7.Moralguidelines:Google’spromiseto“DoNoEvil”isnotgoingto
begoodenough.TheDAEneedssomeclearguidelinesaboutwhatis
andisn’tacceptablebehavior.
Theremaynotbeadistributedautonomousenterpriseinyournearfuture,
butthethinkingbehindthesenewentitiescaninformyourbusinessstrategizing
today.Withtheriseofaglobalpeer-to-peerplatformforidentity,trust,
reputation,andtransactions,wecanfinallyre-architectthedeepstructuresofthe
firmforinnovation,sharedvaluecreation,andperhapsevenprosperityforthe
many,ratherthanjustwealthforthefew.Nowyouhaveatleastsevenemerging
businessmodelsthatcouldhelpyoushakesomewindowsandrattlesomedoors
inyourindustrywhiledistributingwealthmoredemocratically.
Overall,smartcompanieswillworkhardtoparticipatefullyinthe
blockchaineconomyratherthanplayitsvictims.Inthedevelopingworld,the
distributionofvaluecreation(throughentrepreneurship)andvalueparticipation
(throughdistributedownershipofthefirm)mayholdakeytoreconcilingthe
prosperityparadox.Ourstorybecomesevenmoreinterestingwhenyouconsider
thatbillionsofagentswillbeembeddedinthephysicalworld.Whichtakesusto
thenextchapter.
A
CHAPTER6
THELEDGEROFTHINGS:
ANIMATINGTHEPHYSICALWORLD
powerpolecollapsesateighto’clockonahotnightintheremoteoutbackof
Australia.ThisisaproblemforWilliamandOliviaMunroe,whoraisesheepand
cattleonehundredmilesoutsidetheoldgoldminingtownofLaverton,onthe
edgeoftheGreatVictoriaDesert.
1
Inthesummer,thetemperaturefrequently
soarscloseto120degreesFahrenheit(48.9°C).Theirchildren,PeterandLois,
attendschoolviasatellitelink,thefamily’sonlymeansofaccessinghealth
servicesincaseofillnessoremergency.AlthoughtheMunroeshaveabackup
generator,itcan’tpowerthewaterpumps,communications,andair-conditioning
forlong.Inshort,thelivesoftheMunroefamilydependentirelyuponreliable
energy.
Atdaybreak,ninehourslater,thepowerutilitysendsoutateamtofindand
fixthedownedpole.Customercomplaintsgivethecompanyanideaofwhere
thebreakoccurred,buttheteamtakesmorethanadaytoidentify,reach,andfix
thepole.Meanwhile,theMunroesandnearbyresidents,businesses,and
institutionsgowithoutpowerandconnectivityatconsiderableinconvenience,
economicimpact,andphysicalrisk.Intheoutback,blackoutsarenotjust
paralyzing;they’redangerous.Tominimizethesehazards,atgreatexpensethe
companydeploysteamsofinspectorstochecktheextensivenetworkregularly
fordownedordeterioratingpoles.
Imaginehowmuchsafer,easier,andcheaperitwouldbeifeachpowerpole
wereasmartthing.Itcouldreportitsownstatusandtriggeractionsfor
replacementorrepair.Ifapolecaughtfireorbegantotiporfallforanyreason,
itwouldgenerateanincidentreportinrealtimeandnotifyarepaircrewtocome
withtheappropriateequipmenttothepreciselocation.Meanwhile,thepole
couldpotentiallyreassignitsresponsibilitiestothenearestworkingpole.After
all,they’reallonthegrid.Theutilitycouldrestorepowertothecommunity
morequicklywithoutthehugeongoingcostsoffieldinspection.
POWERTOTHEPEOPLE
That’sjustthebeginning.Usingemergingsoftwareandtechnologiesassociated
withtheInternetofThings,wecaninstillintelligenceintoexistinginfrastructure
suchasapowergridbyaddingsmartdevicesthatcancommunicatewithone
another.Imaginecreatinganewflexibleandsecurenetworkquicklyand
relativelyinexpensivelythatenablesmoreopportunitiesfornewservices,more
participants,andgreatereconomicvalue.
Thisconfigurationisknownasameshnetwork,thatis,anetworkthat
connectscomputersandotherdevicesdirectlytooneanother.Theycan
automaticallyreconfigurethemselvesdependinguponavailabilityofbandwidth,
storage,orothercapacityandthereforeresistbreakageorotherinterruption.
Communitiescanusemeshnetworksforbasicconnectivitywheretheylack
accessoraffordableservice.Meshnetworksarealternativestotraditionaltop-
downmodelsoforganization,regulation,andcontrol;theycanprovidegreater
privacyandsecuritybecausetrafficdoesn’troutethroughacentral
organization.
2
Organizationsarealreadycombiningmeshnetworkswithblockchain
technologytosolvecomplexinfrastructureproblems.Filament,anAmerican
company,isexperimentingwithwhatitcalls“taps”onpowerpolesinthe
Australianoutback.Thesedevicescantalkdirectlytoeachotheratdistancesof
upto10miles.Becausethepowerpolesareapproximately200feetapart,a
motiondetectoronapolethat’sfallingwillnotifythenextpole200feetaway
thatit’sintrouble.Ifforanyreasonthetaponthatpoleisn’tavailable,itwill
communicatewiththenextpole,orthenextpole(upto10miles)thatwill
communicatetothecompanythroughtheclosestInternetbackhaullocation
(within120miles).
Withthetap’stwenty-yearbatteryandBluetoothlowenergy(BLE)
technology,customerscanconnecttothedevicesdirectlywiththeirownphone,
tablet,orcomputer.Thetapcancontainnumeroussensorstodetecttemperature,
humidity,light,andsound,allofwhichcustomerscouldusetomonitorand
analyzeconditionsovertime,maybetodeveloppredictivealgorithmsonthelife
cycleorimpendingfailureofapowerpole.Customerscouldbecome
weatherNodesormeterthesedataasaninformationserviceorlicensethedata
setthroughtheblockchaintoanotheruser,suchasagovernment,broadcaster,
polemanufacturer,orenvironmentalagency.
Filament’sbusinessmodelisaservicemodelinvolvingthreeparties:
Filament,itsintegrationcustomer,andtheutilitycompany.Filamentownsthe
hardware;itsdevicescontinuallymonitortheconditionofthepowerpolesand
reportchanges,whetherthey’refallen,onfire,orcompromisedbydust
accumulationorbrushfiresmoke.Filamentsellsthesensordatastreamtothe
integrator,andthisintegratorsellstotheutility.
Theutilitypaysmonthlyforamonitoringservice.Theserviceenablesthe
powercompanytoeliminatetheveryexpensivefieldinspectionofits
operations.Becausepowerpolesrarelyfall,thepowercompanyrarelyusesthe
actualcommunicationcapabilityofthemeshnetwork,andsoFilamentcould
deploytheexcesscapacityofthetapsforotheruses.
“SinceFilamentownsthedevices,wecansellextranetworkcapacityontop
ofthisnetworkthatspansmostofthecontinent,”saidEricJennings,Filament’s
cofounderandCEO.“FilamentcouldstrikeadealwithFedExtogivetheir
semitruckstheabilitytosendtelemetrydatatoHQinrealtime,overour
networkinruralAustralia.WeaddFedExtothesmartcontractlist,andnow
theycanpayeachdevicetosenddataontheirbehalf.”
3
FedExdriverscoulduse
themeshnetworkforcommunicationsandvehicletrackingacrossremoteareas
toindicateestimatedarrivaltimesandbreakdowns.Thenetworkcouldalertthe
nearestrepairfacilitytodispatchthenecessarypartsandequipment.
Blockchaintechnologyiscritical.ThisInternetofThings(IoT)application
dependsonaLedgerofThings.Withtensofthousandsofsmartpolescollecting
datathroughnumeroussensorsandcommunicatingthatdatatoanotherdevice,
computer,orperson,thesystemneedstocontinuallytrackeverything—
includingtheabilitytoidentifyeachuniquepole—toensureitsreliability.
“Nothingelseworkswithoutidentity,”saidJennings.“Theblockchainfor
identityisthecorefortheInternetofThings.Wecreateauniquepathforeach
device.Thatpath,thatidentity,isthenstoredinthebitcoinblockchainassigned
toFilament.Justlikeabitcoin,itcanbesenttoanyaddress.”
4
Theblockchain
(alongwithsmartcontracts)alsoensuresthatthedevicesarepaidforsothey
continuetowork.TheInternetofThingscannotfunctionwithoutblockchain
paymentnetworks,wherebitcoinistheuniversaltransactionallanguage.
SocialEnergy:PoweringaNeighborhood
Now,insteadofpoles,imaginedigitizingeverynodeinapowersystemtocreate
entirenewpeer-to-peermodelsofpowerproductionanddistribution.Everyone
getstoparticipateinablockchain-enabledpowergrid.UnderaNewYorkState–
sponsoredprogramtoincreaseenergyresiliencyeveninextremeweather
conditions,workisunderwaytocreateacommunitymicrogridinthePark
SlopeareaofBrooklyn.Oncebuilt,thismicrogridanditslocallygenerated
powerwillprovideresiliencyinemergenciesandreducecoststocustomers
whilepromotingclean,renewableelectricity,energyefficiency,andstorage
optionsinthecommunity.
Whilecampusmicrogridshavebeenaroundforawhile,theyaren’tcommon
inresidentialareas.Mosthomeowners,businesses,governments,andother
organizationsinurbanNorthAmericagettheirpowerfromregulatedutilitiesat
regulatedprices.Currently,wehavemorevarietyinlocallygeneratedrenewable
energyfrom,say,solarpanelsonrooftops.Thelocalutilitycapturesexcess
powerinitssupplyforredistributionatwholesalerates,oftenwithconsiderable
leakage.Theconsumer,whomaybelocatedacrossthestreetfromalocalpower
source,stillmustgothroughtheutilityandpayfullretailforrenewableenergy
generatedbytheirneighbor.It’sridiculous.
“Insteadofthecommand-and-controlsystemtheutilitieshavenowwherea
handfulofpeopleareactuallyrunningautilitygrid,youcandesignthegridso
thatitrunsitself,”saidLawrenceOrsini,cofounderandprincipalofLO3
Energy.“Thenetworkbecomesfarmoreresilientbecausealloftheassetsinthe
gridarehelpingtomaintainandruntheutilitygrid.”
5
It’sadistributedpeer-to-
peerIoTnetworkmodelwithsmartcontractsandothercontrolsdesignedinto
theassetsthemselves(i.e.,theblockchainmodel).
6
Whenahurricanedestroys
transmissiontowersorfirecripplesatransformersubstation,thegridcanquickly
andautomaticallyreroutepowertopreventamassiveblackout.
Resiliencyisn’ttheonlybenefit.Locallygeneratedpower,usedlocally,is
significantlymoreefficientthantheutility-scalemodel,whichrelieson
transmittingenergyacrossvastdistances,whereenergyislost.LO3Energyis
workingwithlocalutilities,communityleaders,andtechnologypartnersto
createamarketwhereneighborscanbuyandsellthelocalenvironmentalvalue
oftheirenergy.“So,insteadofpayinganenergyservicescompanythat’sbuying
renewableenergycredits,yougettopaythepeoplewhoareactuallygenerating
theelectricitythatisservingyourhouse,thatislocalandgreen,andthatactually
hasanenvironmentalimpactinyourneighborhood.Itseemsalotfairer,right?”
saidOrsini.
7
Right!
Ifyoucanlocateeachoftheassetsandassignlocationalvalueforgeneration
andconsumption,thenyoucancreateareal-timemarket.AccordingtoOrsini,
youcanauctionyourexcessenergytoyourneighborswhomightnotbeableto
generaterenewableenergy.Indoingso,yourcommunitycancreateenergy
resiliencythroughpeer-to-peertrading.Communitymemberscanreach
consensusontherulesofthereal-timemicrogridmarketsuchastime-of-day
pricing,floororceilingprices,prioritygiventoyournearestneighbor,orother
parameterssoastooptimizepriceandminimizeleakage.Youwillnotbesitting
atyourcomputeralldaylongsettingprices,offeringtobuyorsell.
Futuremicrogridswillharvestheatfromthecomputationalpowerneededto
createandsecurethistransactivegridplatform.Distributingthecomputing
powertobuildingsinthecommunityandusingthehighertemperatures
generatedtopowerheating,hotwater,andair-conditioningsystemsincreasesthe
productivityofthesameenergy.“OurfocusisonincreasingExergy,”says
Orsini.
Withincreasinggenerationofrenewablepoweratthelocallevel,theInternet
ofThingsischallengingtheregulatedutilitymodel,andnotamomenttoosoon.
Weneedtorespondtoclimatechangeandbraceourselvesforincreasingly
extremeweatherconditions,particularlymeltingicecapsthatdrownislandsin
oceans,anddroughtsthatturndrylandintodesert.Currently,we’relosingabout
fifteenmillionacresperyeartodesertification,theworstlossesinsub-Saharan
Africawhere,unliketheMunroesoftheoutback,peoplecan’taffordwater
pumps,air-conditioning,ormigration.
8
Weneedourutilitygridsandourengines
nottoleachenergyandcarbonintoouratmosphere.Whiletheutilitiesare
lookingatIoTbenefitstotheirexistinginfrastructure(“smartgrid”),connecting
microgridscouldleadtoentirelynewenergymodels.Utilitycompanies,their
unions,regulators,andpolicymakers,aswellasinnovativenewentrantssuchas
LO3,areexploringthesenewmodelsforgenerating,distributing,andusing
electricityfirstattheneighborhoodlevelandthenaroundtheworld.
THEEVOLUTIONOFCOMPUTING:FROMMAINFRAMESTO
SMARTPILLS
Unlikeourenergygrid,computingpowerhasevolvedthroughseveral
paradigms.Inthe1950sand1960s,mainframesruled—InternationalBusiness
MachinesandtheWild“BUNCH”(Burroughs,Univac,NationalCashRegister
Corp.,ControlData,andHoneywell).Inthe1970sand1980s,minicomputers
explodedontothescene.TracyKiddercapturedtheriseofDataGeneralinhis
1981bestsellerTheSoulofaNewMachine.Likemainframecompanies,most
ofthesefirmsexitedthebusinessordisappeared.WhoremembersDigital
EquipmentCorporation,PrimeComputer,Wang,Datapoint,orthe
minicomputersofHewlett-PackardorIBM?In1982,IBMhardwareand
MicrosoftsoftwarebroughtusthedecadeofthePC,withApple’sMacintosh
barelynippingattheirheels.Howthingschange.
Drivenbythesametechnologicaladvances,communicationsnetworks
evolved,too.Fromtheearly1970s,theInternet(originatingintheU.S.
AdvancedResearchProjectsAgencyNetwork)wasevolvingintoitspresent-
day,worldwide,distributednetworkthatconnectsmorethan3.2
9
billionpeople,
businesses,governments,andotherinstitutions.Thecomputingandnetworking
technologiesthenconvergedinmobiletabletsandhandhelds.BlackBerry
commercializedthesmartphoneintheearlyaughts,andApplepopularizeditin
theiPhonein2007.
Whatisrelativelynewandveryexcitingistheabilityofthesedevicestogo
beyondrelativelypassivemonitoring,measuring,andcommunicating(weather
patterns,trafficpatterns)tosensingandresponding;thatis,executinga
transactionoractingaccordingtopredefinedrulesofengagement.Theycan
sense(fallingtemperatures,trafficjams)andrespond(turnonthefurnace,
lengthenthegreenlight);measure(motion,heat)andcommunicate(emergency
services);locate(burstwatermain)andnotify(repaircrews);monitor(location,
proximity)andchange(direction);identify(yourpresence)andtarget(marketto
you),amongmanyotherpossibilities.
Thedevicescanbestatic(poles,trees,pipelines)ormobile(clothing,
helmets,vehicles,pets,endangeredanimals,pills).Caregiversareusingsmart—
oredible—electronicpills,forexample,toidentifyandrecordwhetherandwhen
apatienttakeshismedication.Askinpatchortattoocapturesthedataandcan
measureheartrate,foodconsumption,orotherfactorsandcommunicatethis
informationtoaphysician,caregiver,orthepatienthimselfthroughanappto
identifypatternsandgivefeedback.Themedicalprofessionwillsoonbeusing
similartechnologyfortargeteddrugdeliverytocertaintypesofcancer,
measuringcoretemperatureandotherbiomarkers.
10
Thedevicescancommunicatewithoneanother,withcomputersand
databasesdirectlyorthroughthecloud,andwithpeople(sendyouatext
messageorcallyourmobile).Thesedevices,throughtheirevolvingmachine
intelligenceandthedatatheycollect,areputtinganalysisofdata,pattern
recognition,andtrendspottingintoindividualhands.
11
Theindustrytermbig
datahardlydescribesthemyriaddatathatthephysicalworldwillgenerate.By
themostconservativeestimate,the10billionorsodevicesconnectedviathe
Internettodaywillgrowtomorethan25billionby2020.
12
Callit“infinitedata”
frominfinitedevices.
Sowhydon’tweliveinsmarthomesanddrivesmartcarsandpracticesmart
medicine?Weseesixbigobstacles.OneistheRubeGoldbergrolloutof
applicationsandservices.Simplyput,fewoftheearlyconsumerIoTdevices
havedeliveredpracticalvalue,unlessyouwantyoursmokedetectortoaskyour
nightlighttocallyoursmartphoneandwarnyouofafire.
13
Anotherisorganizationalinertiaandtheunwillingnessorinabilityof
executives,industryassociations,andunionstoenvisionnewstrategies,business
models,androlesforpeople.Whilesomecreativeentrepreneurshavedeveloped
newbusinessesonsomeoftheseprinciples(i.e.,enablingphysicalassetstobe
identified,searched,used,andpaidfor)andtherebydisruptedexistingmarkets
(e.g.,Uber,Airbnb),theimpactisstillcomparativelyminorandreliantupona
companyanditsappasintermediary.
Athirdisfearofmalicioushackersorothersecuritybreachesthatcould
modifytheinformationandrulesofengagement,overridingdeviceswith
potentiallydisastrousconsequences.Afourthisthechallengeof“future-
proofing,”criticalforcapitalthingswithverylonglifespans,longerthanthelife
spanofatypicalapplicationorevenacompany.Start-upsgobankruptorsell
themselvestolargerfirmsallthetime.
Afifthisscalability;torealizethefullvalueoftheIoT,wemustbeableto
connectmultiplenetworkstogethersothattheyinteroperate.Lastisthe
overarchingchallengeofcentralizeddatabasetechnology—itcan’thandle
trillionsofreal-timetransactionswithouttremendouscosts.
Toovercometheseobstacles,theInternetofEverythingneedstheLedgerof
Everything—machines,people,animals,andplants.
THEINTERNETOFTHINGSNEEDSALEDGEROFTHINGS
WelcometotheInternetofEverythingenabledbytheLedgerofEverything—
distributed,reliable,andsecureinformationsharing,sensing,andautomating
actionsandtransactionsacrosstheInternet,thankstoblockchaintechnology.
Technologistsandsciencefictionwritershavelongenvisionedaworldwherea
seamlessglobalnetworkofInternet-connectedsensorscouldcaptureevery
event,action,andchangeonearth.Withubiquitousnetworks,continued
advancementsofprocessingcapability,andanincreasingarrayofcheapandtiny
connecteddevices,thatvisionofan“InternetofThings”isedgingcloserto
reality.
Remember,SatoshiNakamotodesignedthebitcoinblockchaintoensurethe
integrityofeachbitcointransactiononlineandthebitcoincurrencyoverall.By
recordingeachtransactionateverynodeandthensharingthatrecordwithevery
othernodeonthenetwork(i.e.,theblockchain),theblockchainensuresthatwe
canverifythetransactionquicklyandseamlesslyacrossthepeer-to-peer
network.Wecanconducttransactionsofvalue—inthiscasefinancial—
automatically,securely,andconfidentlywithoutneedingtoknowortrusteach
nodeonthenetwork,andwithoutgoingthroughanintermediary.TheLedgerof
Everythingrequiresminimaltrust.
Blockchaintechnologyenablesustoidentifysmartdeviceswithrelevant
coreinformationandprogramthemtoactunderdefinedcircumstanceswithout
riskoferror,tampering,orshuttingdownintheAustralianoutback.Becausethe
blockchainisanincorruptibleledgerofalldataexchangesthatoccurinthe
network,builtupovertimeandmaintainedbythecollaborationofnodesinthat
particularnetwork,theusercanbesurethedataareaccurate.
Thereisgrowingagreementamongtechnologycompaniesthatthe
blockchainisessentialtounlockingthepotentialoftheInternetofThings.None
otherthanIBM,theprogenitoroflarge,centralizedcomputersystems,hascome
onboard.Inareport,“DeviceDemocracy:SavingtheFutureoftheInternetof
Things,”IBMidentifiedthevalueoftheblockchain:
InourvisionofadecentralizedIoT,theblockchainistheframework
facilitatingtransactionprocessingandcoordinationamonginteracting
devices.Eachmanagesitsownrolesandbehavior,resultinginan
“InternetofDecentralized,AutonomousThings”—andthusthe
democratizationofthedigitalworld...devicesareempoweredto
autonomouslyexecutedigitalcontractssuchasagreements,payments
andbarterswithpeerdevicesbysearchingfortheirownsoftware
updates,verifyingtrustworthinesswithpeers,andpayingforand
exchangingresourcesandservices.Thisallowsthemtofunctionasself-
maintaining,self-servicingdevices....
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Therefore,byusingtheblockchain,wholenewbusinessmodelsopenup
becauseeachdeviceornodeonthenetworkcouldfunctionasaself-contained
microbusiness(e.g.,sharingpowerorcomputingcapabilityatverylowcost).
“Otherexamplesareamusicservice,oranautonomousvehicle,”notedDino
MarkAngaritis,founderofSmartwallet.“Eachsecondthatthemusicisplaying
orthecarisdrivingit’stakingafractionofapennyoutofmybalance.Idon’t
havealargepaymentupfrontandpayonlyforwhatIuse.Theproviderrunsno
riskofnonpayment.Youcan’tdothesethingswithtraditionalpaymentnetworks
becausethefeesaretoohighforsendingfractionsofapennyoffyourcredit
card.”
15
Sparebedrooms,emptyapartments,orvacantconferenceroomscouldrent
themselvesout.Patentscouldlicensethemselves.Oure-mailcouldcharge
spammersforeachitemreceived.Yougettheidea.Withmachinelearning,
sensors,androbotics,autonomousagentscouldmanageourhomesandoffice
buildings,interactivesalesandmarketing,busstopshelters,trafficflowandroad
usage,wastecollectionanddisposal(i.e.,wherethebinsspeaktothetrucks),
energysystems,watersystems,healthcaredevicesembeddedorworn,
inventories,factories,andsupplychains.
CarlosMoreira,CEOofWISeKey,saidthatthegreatestopportunitiesliein
whathecalledtheindustrialblockchain.
16
WISeKey,aSwiss-basedcompany
workingintheareaofidentitymanagement,cybersecurity,andmobile
communications,providessecuretransactionalcapabilitytowatchesandother
wearabledevicesandisnowofferingitstrustmodeltomanufacturersandchip
makersforoutfittingaverylargenumberofotherIoTdevicestobe
authenticatedandtocommunicateacrosstheInternetorothernetwork.“Weare
movingintoanotherworldwherethetrustisdelegatedattheobjectlevel.An
objectthatisnottrustedwillberejectedbytheotherobjectsautomatically
withouthavingtocheckwithacentralauthority,”Moreirasaid.“Thisisahuge
paradigmshiftthathastremendousconsequencesinthewaythatprocesseswill
beconductedintheyearstocome.”
17
Inthisemergingworld,usersconnectwithsmartdevicesusingsecure
identificationandauthentication,potentiallypublic/privatekeys,andtheydefine
therulesofengagement,suchasprivacy,withotherdevices,ratherthangoing
alongwiththerulesofacentralizednodeorintermediary.Manufacturerscan
transfermaintenance,ownership,access,andresponsibilitytoacommunityof
self-maintainingdevices,future-proofingtheIoTandsavinginfrastructurecosts,
replacingeachdeviceexactlywhenithitsobsolescence.
ThustheblockchaincanaddressthesixobstaclestoafunctioningInternetof
Things.Tosumup,thenewLedgerofEverythinghasnineniftynetwork
features:
ResilientSelf-corrects;nosinglepointoffailure
RobustCanhandlebillionsofdatapointsandtransactions
Real-timeStayson24/7/365anddataflowsinstantly
ResponsiveReactstochangingconditions
RadicallyopenConstantlyevolvesandchangeswithnewinput
RenewableCanbemultipurpose,reused,andrecycled
ReductiveMinimizescostsandfriction,maximizesprocessefficiency
Revenue-generatingEnablesnewbusinessmodelsandopportunities
ReliableEnsuresintegrityofdata,trustworthinessofparticipants
WhydowebelievetheIoTenabledbytheblockchainhassuchhuge
potential?Theprimarydriveristhatitallowsanimationofthephysicalworld.
Oncewebringtheseobjectstolifeontheledger,theycansense,respond,
communicate,andtakeaction.Assetscansearch,find,use,andcompensateone
anotheraccordingtosmartcontracts,therebyenablinghighlydisruptivenew
markets,justastheInternethaspreviouslydoneforpeopleandallmannerof
digitalcontent.
Thequestionsformanagers,entrepreneurs,andcivicleaders:Howwillyou
takeadvantageofthesenewopportunitiestochangeandgrow?Howwillyour
organizationrespondtotheinevitabledisruptiontoyourexistingoperational
model?Howwillyoucompetewiththecreativenewmodelsofstart-upsand
collaborations?
Opportunitiesforgreaterefficiency,improvedservice,reducedcosts,
increasedsafety,andbetterresultsaboundinourlives,andwecanimproveeach
byapplyingblockchainlogictotheInternetofThings.We’rebeginningthenext
majorphaseofthedigitalrevolution.MichelleTinsleyofIntelexplainedwhy
hercompanyisdeeplyinvestigatingtheblockchainrevolution:“WhenPCs
becamepervasive,theproductivityrateswentthroughtheroof.Weconnected
thosePCstoaserver,adatacenter,orthecloud,makingitreallycheapandeasy
forleanstart-upstogetcomputerpowerattheirfingertips,andwe’reagain
seeingrapidinnovation,newbusinessmodels.”
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Intelwantstoacceleratethe
processofunderstandingwhat’sworking,what’snotworking,andwherethe
opportunitieslie.“Wecouldseethistechnologybeawholeotherstepfunction
ofinnovation,whereitenablesallsortsofnewcompanies,newplayers.Tobea
leaderinthetechnologyindustry,wecannotbeabsentfromtheconversation,”
shesaid.
19
Justimaginethepotentialofapplyingthesecapabilitiesacrossmany
typesofbusinesses,manyuntouchedbytheInternetrevolution.
THETWELVEDISRUPTIONS:ANIMATINGTHINGS
Whatpossibilitiesarethereforanimatingthephysicalworld?UnlikePinocchio,
wedon’thaveaBlueFairy.(AndunlikePinocchio,theblockchaindoesn’tlie.)
Buttoday,rightnow,wehavedistributedledgertechnologythatwillactually
enablenotonlyGEto“bringgoodthingstolife.”Evenbetter,Pinocchiocan’t
golong-noseontheledger.
We’reintheearlydaysofthinkingaboutthepossibilitiesoftheLedgerof
Everything(builtintotheIoT).Whileconsumerdeviceshavereceivedthemost
attentioninthepopularmediatodate,therearepotentialapplicationsacross
virtuallyeverysector.Therearemanywaysofclassifyingandgroupingpotential
applicationsbecausesomanyapplicationscrossboundariesandcouldfitinto
morethanonecategory.McKinsey,forexample,usestheconceptofsettingsin
itsclassificationoftheIoT.
20
We’veidentifiedopportunitiesfortheLedgerof
Everythingintwelvemajorfunctionalareas.Specificbenefits—andthebusiness
case—willbespecifictoeachapplication.Thecategoriesbelowillustratethe
potentialandthepotentialsignificantdisruptiontoexistingmarkets,players,and
businessmodels.
1.Transportation
Inthefuture,you’llcallupanautonomousvehicletogetyousafelywhereyou
needtogo.Itwillintuitivelytakethefastestroute,avoidconstruction,handle
tolls,andparkallonitsown.Intimesoftrafficcongestion,yourvehiclewill
negotiateapassingratesothatyouarriveatyourdestinationontime,and
freightmanagerswillusetheblockchain-enabledIoTonallcargotoclear
customsorotherrequiredinspectionsquickly.Noredtape.Allianz,a
manufacturerofstreetsweepers,couldequipitsmunicipalmachineswith
minicamorsensortechnologythatidentifiedcarswhoseownershadn’tmoved
them(iftheycouldn’tmovethemselves)onalternate-side-of-the-street-parking
daysinNewYorkCity,feedthatsensordatatothetrafficpolice,andsparethe
physicalwritingofparkingtickets.Or,thestreetsweeperitselfcouldextractthe
parkingfineinbitcoinfromthecaritselfasitsweptby—becausetheNewYork
StateDepartmentofTransportationwouldrequireallcarsregisteredinthefive
NewYorkCityboroughstomaintainbitcoinwalletsconnectedtotheirlicense
plates.Autonomousvehicles,ontheotherhand,wouldsensetheoncoming
sweeperandsimplymovethemselvestoletitpass.
2.InfrastructureManagement
Manyprofessionalswillusesmartdevicestomonitorlocation,integrity,age,
quality,andanyotherrelevantfactorsofpavement,raillines,powerpolesand
lines,pipelines,runways,ports,andotherpublicandprivateinfrastructurein
ordertomonitorconditions,detectproblems(e.g.,breakageortampering),and
initiatearesponsebothrapidlyandcost-effectively.That’swherecompanies
suchasFilamentwillcomein,withnewaffordabletechnologiestoanimate
existinginfrastructurewithoutthehugecapitalrequiredtoreplaceit.Eric
JenningsofFilamentestimatesthat“over90percentofinfrastructureis
currentlydisconnected,andit’sunfeasibletoripitalloutandreplaceitwith
brand-new,wireless,connectedassets.”
21
3.Energy,Waste,andWaterManagement
“Sendatrucktoemptyme,”saidtheoverflowingwastebin.“Fixme,”saidthe
leakypipe.TheInternetofThingsshouldinspireahundrednewchildren’s
books.Traditionalutilitiesinboththedevelopedanddevelopingworldcanuse
theblockchain-enabledIoTfortrackingproduction,distribution,consumption,
andcollection.Aswe’vealreadyseen,newentrantswithoutsignificant
embeddedinfrastructureareplanningtousethesetechnologiestocreateentirely
newmarketsandnewmodels(e.g.,communitymicrogrid).
4.ResourceExtractionandFarming
Cowscanbecomeblockchainappliances,enablingfarmerstotrackwhatthe
cowseat,whichmedicationsthey’vehad,andtheircompletehealthhistory.This
technologycanalsohelptrackexpensiveandhighlyspecializedequipmentand
makeitmorewidelyavailableforjust-in-timeusageandcostrecovery;improve
minerandfarmworkersafetythroughtaggingofsafetyequipmentand
automatedchecklists(toensurethatequipmentisbeingusedproperly);monitor
weather,soil,andcropconditionstostartirrigation,automatedharvesting,or
otheractions;andcompile“infinitedata”analyticstoidentifynewresourcesor
adviseonagriculturalbestpracticesbasedonpastpatternsandresults.Sensors
insoilandontreescouldhelpenvironmentalprotectionagenciestomonitor
farmersandtheirusageoftheland.
5.EnvironmentalMonitoringandEmergencyServices
RememberautonomousweatheragentBOB?BOBwillliveinaworldof
weathersensorsandmakemoneycollectingandsellingcriticalweatherdata.
Exampleshereincludemonitoringairandwaterqualityandissuingalertsto
reducepollutantsorstayindoors;flaggingdangerouschemicalsorradioactivity
foremergencyworkers;monitoringlightningstrikesandforestfires;installing
earthquakeandtsunamiearlywarningandalertsystems;and,ofcourse,storm
monitoringandearlywarning.Inadditiontoimprovingtheresponsetimefor
emergencyservicesandreducingtheriskoftheseeventstohumanlife,wecould
usethislongitudinaldatatoincreaseourunderstandingofunderlyingtrendsand
patterns,identifypreventivemeasuresinsomecases,andimproveourpredictive
capabilitytoprovideevenearlierwarning.
6.HealthCare
Inthehealthcaresector,professionalsusedigitizationtomanageassetsand
medicalrecords,keepinventory,andhandleorderingandpaymentsforall
equipmentandpharmaceuticals.Today,hospitalsarefullofsmartdevicesthat
overseetheseservices,butfewcommunicatewithoneanotherortakeinto
accounttheimportanceofprivacyprotectionandsecurityindirectpatientcare.
Blockchain-enabledIoTcanuseemergingapplicationstolinktheseservices.
Applicationsindevelopmentincludemonitoringanddiseasemanagement(e.g.,
smartpills,wearabledevicestotrackvitalsignsandprovidefeedback)and
improvedqualitycontrol.Imagineanartificialhiporkneethatmonitorsitself,
sendsanonymizedperformancedatatothemanufacturerfordesign
improvements,andcommunicateswithapatient’sphysician,“Timetoreplace
me.”Technicianswillbeunabletousespecializedequipmentiftheyhaven’t
takenprerequisitestepstoensuretheirreliabilityandaccuracy.Newsmartdrugs
couldtrackthemselvesinclinicaltrialsandpresentevidenceoftheir
effectivenessandsideeffectswithoutriskofmodifiedresults.
7.FinancialServicesandInsurance
FinancialinstitutionscouldusesmartdevicesandtheIoTtotagtheirclaimson
physicalassets,makingthemtrackableandtraceable.Becausedigitalcurrencies
enablethestorageandtransferofvaluerapidlyandsecurelyforalluserslarge
andsmall,theyalsoenableriskassessmentandmanagement.Thinkingfurther,
couldthepooranddisadvantagedearnsmallamountsofcash,orperhaps
electricityorother“credits,”iftheyallowedtheirlimitedassetstobetaggedand
sharedasintheearliermicrogridexample?Ownerswillbeabletotagpriceless
objects,antiquities,jewelry,thestuffofmuseums,anythingeverhandledby
Sotheby’sandinsuredbyLloyd’s.Insurerscouldadjustpaymentaccordingto
wheretheobjectisanditsenvironment—ifit’sinNewYork’sMetropolitan
MuseumofArtundercontrolledclimate,thenalowerinsurancerate;iftraveling
toGreece,thenchargeahigherrate.Theobjectcouldtellwhetheritwasina
vaultoraroundacelebrity’sneck.Insuranceratescouldbehigherifthedevice
washangingonLindsayLohan’sneckversus,say,AnneHathaway’s.Driverless
carswouldsurelyhavelowerinsurancerates,anddevicesthemselvescould
settleinsuranceclaimsonthespotbasedonsensordata.
8.DocumentandOtherRecordKeeping
Aswehaveexplained,physicalassetscanbecomedigitalassets.All
documentationrelatingtoaparticular“thing”canbedigitizedandcarriedonthe
blockchainincludingpatents,ownership,warranties,inspectioncertification,
provenance,insurance,replacementdates,approvals,etcetera,significantly
increasingdataavailabilityandintegrity,reducingpaperworkhandling,storage,
andloss,andotherprocessimprovementsrelatedtothatdocumentation.For
example,avehiclewillnotstartifitfailedarecentsafetyinspection,ifits
liabilityinsurancehasexpired,ifitsownerhasfailedtopayparkingticketsor
movingviolations,orifthedriverslicenseofthepersonattemptingtodriveit
hasbeensuspended.Itemsontheshelveswillnotifystoremanagerswhen
they’vepassedtheir“sellby”date.Storemanagersmightevenprogramthese
itemstolowertheirownpriceasthesell-bydateapproaches.
9.BuildingandPropertyManagement
Anestimated65percentofthetwelvebillionsquarefeetofcommercialreal
estateintheUnitedStatesisvacant.
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Digitalsensorscancreatemarketplacesof
theserealestateassetsbyenablingreal-timediscovery,usability,andpayment.
Vendorsarenowenteringthisfieldanddevelopingnewservicemodelstorent
thespaceinoffhours.Intheevenings,yourconferenceroomcanmoonlightasa
classroomforneighborhoodyouthoranofficeforalocalstart-up.Other
applicationswillincludesecurityandaccesscontrol,lighting,heating,cooling,
andwasteandwatermanagement.Thegreenestofbuildingswillrunonthe
LedgerofThings.Imaginethedataonelevatorusageandflowofpeoplethrough
thebuilding,howthesewillinformanarchitect’sdesignofpublicandprivate
spaces.SpareresidentialspacecanlistitselfandnegotiatethroughtheLedgerof
Everythingtohelptourists,students,managersofhomelessshelterprograms,
andothersfindspacethatmeetstheirneeds.Theseideasapplytoalltypesof
residential,hotel,office,factory,retail/wholesale,andinstitutionalrealestate.
10.IndustrialOperations—TheFactoryofThings
TheglobalplantfloorneedsaglobalLedgerofThings,akatheindustrial
blockchain.Factorymanagerswillusesmartdevicestomonitorproduction
lines,warehouseinventory,distribution,quality,andotherinspections.Entire
industriesmayadopttheledgerapproachtosignificantlyincreaseefficiencyfor
suchprocessesassupplychainmanagement.Largeandcomplexmachines,like
airplanesandlocomotives,consistofmillionsofparts.Eachindividual
componentofajetengineorrailcarcouldhavesensorsthatsendoutanalert
whenitneedsfixing.ImagineatrainonitswayfromBaltimoretoLongBeach
notifyingthemaintenancecrewinLongBeachthreedaysaheadoftimethatit
neededacriticalnewpart.ThesensorcouldevenissueanRFPandacceptthe
bestbidanddeliveryforthepart,cuttingtimeandmassivecostoutofthe
operatingefficienciesoflargecorporationslikeGeneralElectric,Norfolk
Southern,andothers.Evenmoresignificant,manufacturersinrealmsfromcars
tolightbulbstoBand-Aidsareinvestigatinghowtheycanembedsmartchips
intotheirproductsorpartsthereofandmonitor,collect,andanalyzeperformance
data.Withsuchdata,theycouldprovideautomaticupgrades,anticipateclient
needs,andoffernewservices,ineffectchangingfromproductsuppliersto
ongoingsoftware-basedservices.
11.HomeManagement
Feelinglonely?Youcanalwaystalktoyourhouse.Yourownhomeand
numerousproductsandservicesareenteringthemarkettoallowautomatedand
remotehomemonitoring.Theseservicesgobeyondthe“nannycam”toinclude
accesscontrols,temperatureadjustments,lighting,and,eventually,justabout
everythingelseinyourhome.While“smarthomes”havebeenrelativelyslowto
takeoff,companiessuchasApple,Samsung,andGoogleareworkingto
simplifyinstallationandoperations.AccordingtoBCCResearch,“TheU.S.
homeautomationmarketisestimatedtogofromalmost$6.9billionin2014to
$10.3billionin2019...thegrowthwillbesteadyandlong-term.”
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12.RetailOperationsandSales
Walkingdownthestreet,yourmobiledeviceadvisesyouthatthedressyoulove
isavailableattheGap.Walkintothestoreandthedress,inyoursize,iswaiting
foryou.Aftertryingiton,youscanitandthepaymentiscomplete.Butyou’ve
gototherthingstodo,sothedressfindsitswaytoyourhousebeforeyouget
home.Inadditiontooperationalefficienciesandenvironmentalmonitoring,
retailerswillbeabletopersonalizeproductsandservicestoidentifiable
customersastheywalkordrivebybasedontheirlocation,demographics,
knowninterests,andpurchasinghistory,providedthatthosecustomersopened
theirblackboxestoretailersontheblockchain.
THEECONOMICPAYOFF
Throughoutthischapterwe’vereferencednumerouspotentialbenefitsofthe
distributed,blockchain-enabledIoTatmanylevels(individual,organizational,
industrial,societal).Redesigningandautomatingprocessesacrosspeer-to-peer
networks,ratherthanthroughpeopleorcentralizedintermediaryapps,could
bringnumerousbenefitsasalreadyidentifiedincluding:
Speed(end-to-endautomation)
Reducedcosts(associatedwithsendingnearlyinfiniteamountsofdata
togiantcentralprocessingfacilities;eliminationofexpensive
intermediaries)
Increasedrevenue,efficiency,and/orproductivity(freeingupexcess
capacityforreuse)
Improvedeffectiveness(built-inchecklistsandotherprotocolsreduce
impactofhumanerror)
Increasedsecurityandintegrity(person-to-persontrustisnotrequired
astrustisdesignedintothenetworkarchitecture)
Reducedlikelihoodofsystemfailure(eliminationofbottlenecks,built-
inresiliency)
Reducedenergyconsumption(energyrequiredbythenetworkitself
offsetbyincreasedefficiencyandreducedwastage,dynamicpricing,
andfeedbackloops)
Increasedprivacyprotection(intermediarycan’toverrideorignore
rulesdefinedintheblockchain)
Improvedunderstandingofunderlyingpatternsandprocessesand
opportunitiestoimprovethemthroughthecollectionandanalysisof
“infinitedata”
Strengthenedpredictivecapabilityofvariouseventswhethernegative
(severeweather,earthquakes,failinghealth)orpositive(besttimeto
plantcrops,buyingpatterns).
ThedistributedopenmodelmeansthatIoTnetworkscanbeself-sustaining
evenafteracompanypullsoutoramanufacturerfails.Interoperability,when
designedintothesystem,willenabletheconnectingofdifferentIoTnetworks
andwillunleashevengreatervalue.
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Manyofthesebenefitsdependupontheconceptsofdistributed,or
decentralized,networksandtheeliminationofacentral(e.g.,commandand
control)orotherintermediary(e.g.,aclearinghouseormanagementapp).Once
thesenewintermediariesareinplace,otherswillfeelpressureto“workaround”
oreliminatethem.InEricJennings’sview,“Peoplewilldothethingsthey’lldo
tominimizetheirowndiscomfort,leadingtosilosandconcentrationand
centralization.What’sashort-termgainforthoseparticularpeopleisalong-term
lossforeveryoneelse.”Hesaid,“TheInternetofThingsshouldbecompletely
decentralizedwheredevicescanbeautonomous,discovereachotherdirectly,
establishsecurecommunicationwitheachotherdirectly,andeventuallypay
eachotherinvalue,directlybetweenmachines.”
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TheIBMInstituteforBusinessValuehasconductedresearchintowhatit
callsthefivemajor“vectorsofdisruption”thatwillincreaseourleverageof
physicalassetsastheresultoftheblockchain-enabledIoT.
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WhileIBMclearly
hasabusinessinterestintheIoT,itsworkonbusinessvalueisnonethelessvery
helpful.
First,theinstitutenotedthatthesenewnetworkswillenableusersto
instantlysearch,access,andpayforavailablephysicalassets,suchas
underutilizedstorageorcomputingcapability.Theassetsinsupplycanmatch
themselvestodemand.Becausewecanassessriskandcreditautomatically
onlineandrepossessvirtually,wecanrepricecreditandrisksignificantly
downward.Automatedusageofsystemsanddevicesimprovesoperational
efficiency.Finally,firmscancrowdsource,collaborate,andoptimizewith
businesspartnersinrealtimethroughdigitallyintegratedvaluechains.
Inshort,youhaveanopportunitytomakeconceptuallysimpler,more
efficientmarkets.Youcanaccesspreviouslyinaccessibleassets,determineprice
inrealtime,andreduceyourrisk.Oncethebasicinfrastructureisinplace,
barrierstoentryarelow(e.g.,justdevelopanapp),andtheongoingcostsalso
relativelylow(e.g.,nomorethird-partyservicefees).Itdrasticallylowersthe
costoftransmittingfundsandlowersthebarriertohavingabankaccount,
obtainingcredit,andinvesting.Itcouldevensupportmicropaymentchannels,
matchingminute-by-minuteserviceusagewithminute-by-minutepayment.
TheLedgerofThingsenables“distributedcapitalism,”notjustredistributed
capitalism.Farfromafree-for-all,thesemarketscanbeshapedaccordingtoour
values—asindividuals,companies,andsocieties—andthesevaluescodedinto
theblockchain,suchasincentivestouserenewableenergy,useresourcesfrom
ourclosestneighborsfirst,honorpricecommitments,andprotectprivacy.In
short,theLedgerofEverythingontopoftheIoTanimatesandpersonalizesthe
physicalworldevenaswesharemore.AsIBMstated,“Atamacroeconomic
level,weareallwinnersintheIoTfuture,eventhoughdifferentindustrieswill
experienceamixofdifferenteffects.”
27
AccordingtotheMcKinseyGlobal
Institute,theeconomicvalueoftheIoThas,ifanything,beenunderestimated;
theeconomicimpact—includingconsumersurplus—couldbeasmuchas$11.1
trillionperyearin2025forIoTapplications.
28
That’sa10percentliftoncurrent
globalGDPofwellover$100trillion;that’shuge!
Networkedintelligence,aphrasecoinedinTheDigitalEconomy,referredto
howthenetworkwouldbesmarterthanitssmartestnodeinonedomainafter
another.Aswehaveexplained,thefirstgenerationoftheInternetdropped
transactioncostssomewhat.Wehavefastersupplychains,newapproachesto
marketing,andpeer-to-peercollaborationslikeLinuxandWikipediaona
massivescale,withmanyinnovativenewbusinessmodels.Blockchain
technologywillacceleratethisprocess.AstheInternetofThingstakeshold,
thesetrendswillgointohyperdrive.
THEFUTURE:FROMUBERTOSUBER
We’vecoveredalotofgroundinthischapter.Nowlet’spullallthestrandsof
innovationtogetherinjustonescenario.
ConsiderserviceaggregatorslikeUberandLyft.Uberisanapp-basedride-
sharingnetworkofdriverswhoarewillingtogiveotherpeoplealiftforafee.
TouseUber,youdownloadtheUberapp,createanaccount,andprovideUber
withyourcreditcardinformation.Whenyouusetheapptorequestacar,itasks
youtoselectthetypeofcaryouwantandmarksyourlocationonamap.The
appwillkeepyoupostedontheavailabilityandwhereaboutsofyourprospective
driver.Attheendoftheride,Uberautomaticallychargesyourcreditcard.Ifyou
don’twanttogivethedefaulttip,thenyouneedtochangeyourbillingsettings
onUbersWebsite.
29
UberTechnologies,Inc.,thecompanybehindthe
developmentandoperationoftheUberapp,retainsashareofthepricepaidfor
everyride.
Itsoundsgreat,particularlyincitieswithasmalltaxifleet.ButUbers
servicescomewithanumberofproblemsandredflags.Driveraccountshave
beenhacked,ridesaresubjecttosurgepricing,andpassengershavebeensubject
torecklessdrivingandsexualharassmentorassault.
30
Uberisalsotracking
users’everymove,releasingsomeofthisinformationtocityofficialsfortraffic
studies.Totopitalloff,driverscreateconsiderablevaluebuttheygettokeep
onlypartofit.
Nowlet’simaginetheUberexperienceifitwereadistributedapplicationon
theblockchain.MikeHearn,aformerGoogleemployeewhoquithisjobtowork
fulltimeonbitcoin,laidoutthisalternativeuniversebasedonbitcoin
technologyatthe2013TuringFestival.
31
Hearncalledthisnetwork“TradeNet”
anddescribedhow,withthehelpofbitcoin,peoplecouldbegintorelyon
driverlessvehicles.
Itworkslikethis.Mostpeopledon’towncars,butrathersharevehiclesina
commons.InChicago,MelissarequestsacarthroughSUber(thinkblockchain
SuperUber).Alltheavailablevehiclesstartautomaticallypostingoffers,which
Melissa’snoderanksandpresentstoherbasedonherselectioncriteria.Melissa
factorsinhowmuchshe’swillingtopayforfasterroutes(e.g.,higher-pricedtoll
lanes).
MeanwhileJohn,unlikemostusers,isaSUbervehicleownerandashis
self-drivingcaristakinghimtowork,itidentifiesalltheparkingoptions,both
publicandprivatelyowned,selectsaspace,andreservesandpaysforitthrough
anautonomousparkingmarketplace.BecauseJohn’spredeterminedparameters
alwaysincludeseekingthecheapestavailablespotwithinaten-minutewalkof
hisdestination,healmostalwaysgoeswithhiscarsfirstchoice.Theunderlying
parkingdatabasethatsupportstheparkingalsocontainsinformationonparking
rulesforspecificstreetsondifferentdaysandatdifferenttimesofday,whether
ornottheparkingspaceiscoveredorintheopen,orwhethertheownerofthe
spacehasestablishedaminimumprice.Allthisrunsonadistributedpeer-to-
peerplatform—connectingmultipleapps—sonocentralizedcompanyis
mediatingtheordersortakingpartofthefee.Thereisnosurgepricingandno
unexpectedfees.
Whatisstrikingaboutthisproposedmodelisnotthedriverlessvehicles,
becauseself-drivingcarswillbecommonplace—probablysoonerratherthan
later.Rather,thecarscouldbefullyautonomousagentsthatearntheirownfares,
payfortheirownfuelandrepair,gettheirownautoinsurance,negotiateliability
incollisions,andoperate(“drive”)withoutoutsidehumancontrol,exceptwhen
theyneedtotakesomeentity—maybeahumanbeing—tocourt.
Asaconditionofoperating,SUberadministratorscouldprogramthe
vehicles’protocolsintotheblockchaintoobeyalltrafficrules,takethemost
direct,fastest,orleastexpensiveroute,andhonortheirbids.Thedrivers’initial
entryandregistrationintotheSUbersystemcouldrequirevehiclestoregister
necessarydocumentationincludingownership,safetyinspections,andinsurance,
andthesystemwouldpermanentlylogtheserecordstoensurereinspectionor
insuranceandpermitrenewalsasrequired.Sensorscouldmonitortheoverall
“health”ofthevehicleandsignalnecessaryrepairs,maketheappointmentatthe
appropriaterepairshop,andpreorderanynecessaryparts.Becausethevehicles
aredriverless,they’renotsubjecttosarcasm,cronyism,sexism,racism,orother
formsofhumandiscriminationorcorruption.Plus,theywon’ttrytopushtheir
politicsorlinethedashboardwithincense.Allofthishappensbehindthe
scenes,betweenobjects,andpoweredbyanautonomousapplication.The
drivershavecreatedablockchaincooperativeasdescribedintheprevious
chapterandtheyreceivenearlyallthewealththeycreate.Theusers—Melissa
andJohn—experienceonlytheconvenience,withnoneofthehassle.What’snot
tolove?
WheretheInternetreducedthecostsofsearchandcoordination,adigital
currencylikebitcoinontheblockchainwillenableustocutthecostsof
bargaining,contracting,policing,andenforcingthesecontracts.We’llbeableto
negotiatethebestdealandgetthepromiseddeliveryfromanyotherentitythat
willacceptbitcoin,includingadriverlesstaxi.HowwilltheUbersoftheworld
compete?
Butthescenariodoesn’tstopthere.Intelligencedesignedintothecity’s
infrastructurewillmovetrafficalong(variablelanedirection,variablepricing,
automatedtrafficsignalmanagementbasedontrafficflow),furtherreducing
wastedenergyandcosts.Theblockchaincouldsupportsafetycontrols,bothon
thevehicles(driveranddriverless)and/orontheinfrastructure,suchas
proximitywarningsandautomatedbraking,aswellasantitheftorpreventionof
unqualifiedorinebriateddriversfromtakingthewheel.Inaddition,citieswill
usethesensorstohelpmanagethetransportationinfrastructure,includingasset
managementofinfrastructureandfleets,monitoringraillineandpavement
conditions,generatingmaintenanceplansandbudgets,anddispatchingrepair
crewswhennecessary.
What’strulypowerful,thesystemsworktogether—intelligentvehicles
operatingonanintelligentinfrastructure.Whiletherewillstillbebusinessfor
driversofsharedvehicles,autonomousvehicleswillbeabletooperatesafelyon
citystreetswiththeirbuilt-innavigationandsafetysystems,ofteninteracting
withtheintelligentinfrastructuretofindandpayforanacceleratedlane,or
parking,ortosearchforandfindapreferredroute.Thereadyavailability,
affordability,andreliabilityoftheautonomousvehicleswillsignificantlyreduce
thenumberofprivatevehiclesthat,likethecommercialrealestateexample
above,areoftenjustparkedwaitingandunused.
Anditwon’tjustbetechnologyorcarcompaniesthatwillmakethishappen.
Whileallofthiscould,intheory,bedeveloped,owned,operated,andmanaged
byasinglecivictransportationauthority,thatislikelynottobethepathforward.
SUberismorelikelytoevolveandinnovateasanopenandsharedtransportation
platform,withvariousapplicationsdevelopedandintroducedbylocal
entrepreneurs,communitygroups,government,andothersineitheraprofit-
making(throughrevenueearnedonafleetofdriverlessvans),sharedco-op(a
neighborhoodgroupinvestsintenvehiclestobereservedandsharedusingthe
SUberapp),publicservice(maintainingandoperatingatrainorexpressbuses
onhigh-demandroutes),orsocialenterprise(not-for-profitsinvestinginSUber
“points,”whichtheirclientscanaccesswhentheyneedtransportation).
Thismayemergefirstinjurisdictionswithrelativelyadvanced
infrastructure,alreadyseparatetransportationcorridors(rail,road,bike,
pedestrian),significanttransportationissues(trafficcongestion),anda
populationwithalongtraditionofobeyingtrafficrules.Itmayalsobeginin
“greenfield”citydevelopmentsincooperationwithtechnologycompaniesand
carcompanieslookingfortestbedsfortheirapplications.Anyscenario
involvingdriverlessvehicleswouldbelesssuccessful,evenhighlydangerous,
whenotherroaduserscannotbeisolated(onseparatecorridors),orpredicted
(animalsontheroad),orcontrolled(distractedpedestrians).
TheSUberscenarioisincreasinglyfeasible.Suchapplicationswilllikely
emergeinthenextfewyearsandcometosolveourtransportationneedsoverthe
longterm.Alreadytoday,localtaxiandlimousinecommissionsarebattling
Uberinmanycities.Citygovernmentsarestrugglingtobalanceconsumerdesire
foraffordableoptionswithpublicsafetyandtaxilicensing,evenasthenew
modelsareseeminglyinevitable.Whynotlookwherethetransportationsectoris
goinganddesignsolutionsthatbestmeetthecity’sneeds,asChicagohasdone
inourhypotheticalSUberscenario?
HACKINGYOURFUTUREFORAWORLDOFSMARTTHINGS
We’veseenthroughoutthischaptersomemind-bogglingopportunitiesin
virtuallyallaspectsofourlives,including—perhapsespecially—manyareas
barelytouchedbythefirstwaveofthedigitalrevolution.Atthesametime,these
opportunitiesthreatenexistingbusinessesandwaysofdoingbusiness.
KeyIssues:Whatshouldyouasamanagerbedoingonbothsidesofthis
equation—torealizenewopportunities,whileminimizingthreats?Whether
you’reamanagerinthepublic,private,orsocialsector,doyouhaveun-or
underutilizedphysicalassetsthatcanbetappedforgreatervalue?Areyou
realizingthegreatestpossibleefficienciesandopportunitiestodevelopproducts
andtechnologiesfortheIoTitself?Arenewentrantsintothiseconomytaking
yourcustomersandreducingyourrevenuesthroughinnovativenewapp-based
businessmodelsthatyoushouldbeinstallingfirst?
NewValue:Whatareyourphysicalassetsandhowcanyouenhancethemto
delivergreatervaluetoyourorganizationorcommunity?Doyouhavephysical
spaces,machines,inventory,orotherassetsthatyoucouldtag,monitor,and
animateaspartofanautonomousnetworkwhereyouestablishtheoperating
parameterstodriveoutcostsoraddvalue?Couldyouembed,upgrade,and
programsensorsaspartofalargernetworkforgreaterfunctionalityandvalue?
CouldyougleannewinformationfromanIoTnetworktoimproveyour
planningandanalysisforthefuture?
NewBusinessModels:Whatopportunitiesexistfornewproductsand
servicesbasedonthenewfunctionalityanddatayoucouldgatherthroughyour
network?Couldyourinformationandassetsearnrevenuebecauseoftheirvalue
toothers,forexample,rentingoutthatexpensivepieceofequipmentwhen
you’renotusingit?Thinkingaboutthevalueofinformationisnotnew
(rememberSabreandAmericanAirlines?),butstilloverlooked.
Opportunities:Couldyoulinkyournetworkupwithothersforevengreater
value,perhapsaspartofanend-to-endsupplychainordistributionandsales
channel?Asanindustry,aretheresharedprocessesandfunctionsthatcouldbe
automatedbyutilizingtheblockchain?Areyouenablingthisinteroperabilityby
usingtechnologybuiltonopenstandardsandvettedthroughinternational
collaboration?
Threats:WhatlinesofbusinesswillnewentrantsattackwiththeirnewIoT-
basedbusinessmodelstoservemarketsthatyoucurrentlyserve?Forexample,
ratherthanaone-timesaleofavehicle,consumergood,orpieceofspecialized
equipment,isthereongoingvalueforyouandyourclientsinanewservice
modelbuiltuponyourongoingconnectiontothatequipment?Canyoucapitalize
uponyourexistingexpertise,resources,infrastructure,andcustomerloyaltyto
designnewIoT-basedbusinessmodelsthatdecreasethe“space”and,therefore,
thelikelihoodofentryofadisruptivenewplayer?
BusinessCase:Whatarethecostsandbenefitsoftheseopportunities?
Wheredoestherealvalueexistforyourorganization?Areyousolvinganactual
businessproblemorneedorjustleadingwiththetechnology?Howabout
developingaproofofconceptwithaleadingclient?
StrategicPlan:AccordingtoMcKinsey,“executiveswillneedtodealwith
threesetsofchallenges:organizationalmisalignment,technological
interoperabilityandanalyticshurdles,andheightenedcybersecurityrisks.”
32
We
addafourthmajorchallengetothislist—buildinginprivacyandanincentive
plan,includingappropriatesafeguards,fromthebeginning.HowwillITand
businessfunctionshavetoadapttotheIoT?Whichpartsoftheorganizationand
businessleadersshouldyouinvolve?
T
CHAPTER7
SOLVINGTHEPROSPERITYPARADOX:
ECONOMICINCLUSIONAND
ENTREPRENEURSHIP
APIGISNOTAPIGGYBANK
hePacificcoastofNicaraguaisoneofthemostbeautifullandscapesinthe
Americas,whereverdantgreenforestmeetsendlessbluewaters.Itsrolling
hillsandstunningbeachesmakeitatopdestinationforbackpackers,sunbathers,
andecotouristsalike.Nicaraguaisalsooneofthepoorestandleastdeveloped
countriesintheregion.Sixtypercentofthepopulationlivesbelowthepoverty
line.Thosenotemployedinitstourismindustrysurviveonnear-subsistence-
levelagricultureandfishing.Nicaraguahasthesecond-lowestnominalgross
domesticproductintheAmericas,with10percentofitsentireGDPfrom
remittances—moneyearnedoverseasandrepatriatedbytheNicaraguan
diaspora.NineteenpercentofNicaraguanshaveaformalbankaccount,butonly
14percentareabletoborrowandonly8percenthaveformalsavings.
1
Yet93
percenthaveamobilephonesubscription,usuallyintheformofprepaidaccess.
2
ThatistherealitythatJoyceKimfacedwhenshetookherteamdownto
Nicaragua.KimistheexecutivedirectoroftheStellarDevelopmentFoundation,
anot-for-profitblockchaintechnologyorganization(nottobeconfusedwith
Stellar,thelargearchitectureandconstructionfirm).ANicaraguanmicrofinance
operationwantedtolearnmoreaboutStellarsfinancialplatform.Thewoefully
underdevelopedbankingindustryinNicaraguakeepsmostpeopleinan
inescapablecycleofpovertyandexacerbatestheplightofwould-be
entrepreneurs.Theystruggletostartnewbusinesses,registertitlestotheirland
andotherassets,andresolveoutstandingclaimsfromtheSandinista
government’smasslandexpropriationinthe1980s.
3
Stellarsplatformwould
enableNicaraguanstotransfer,save,invest,borrow,andlendmoney.
Kimwasbothimpressedandsurprisedbythelocalfocusonmicrocredit.
Sheunderstoodthataccesstocreditwasparamounttoeconomicinclusionbut
believedthatsavings,theabilitytostorevaluereliablyandsecurely,wasa
prerequisiteforalmostallotherfinancialservices.WhenKimaskedabout
savings,shewastold,“Oh,savingsisnotaproblemaroundhere.Peoplehave
pigs.”
4
Livestockmakesupthevastmajorityoffarmers’networthinmanyagrarian
economiesbecausefinancialservicesarenotwidelyavailableandindividuals
haveatenuousrighttotheirland.InNicaraguathatmeanspeopleownpigs,and
lotsofthem.Kimwassurprisedatfirst,butquicklysawtheage-oldlogictoit.
“Youwalkoutofameeting,andyoulookaroundandyouseepigsare
everywhere.”
5
Livestockhaslongbeenanaccepted,relativelyusefulformof
savings.Forthoseexcludedfromthedigitaleconomy,animalsareaboutas
liquidanassetasyoucanown,evenmoresoiftheyproducemilk,andtheypay
dividendsinpiglets,eggs,lambs,calves,andsometimescheese.
Prosperityisarelativeconcept.InKenya,Masaitribesmenwhoownfourto
fivehundredheadofgoatsareconsideredprosperous,buttheirlivescanbe
rough,brutish,andshort.Livestock-basedwealthis“highlylocalized,sothat
youcan’tactuallytransactwithanybodyunlessthey’rerightthereinfrontof
you,”Kimsaid.“Yourunthehugeriskswithyouranimalsrunningawayor
gettingsickorsomeblightcomingthatcouldactuallywipeoutallofyour
savings.”
6
Creditwasaneventoughernuttocrackthansavings.Kimgottoknowa
localNicaraguanfisherman,amemberofacooperative,whoexplainedthatno
onefishermaneverhasaccesstoenoughcredittooutfitanentirerig.According
toKim,“theyformfishermencrewswhereonepersonwillgetaloanforthenet,
somebodyelsewillgetaloanforthebait,somebodyelsegetsaloanforthe
boat,somebodyelsealoanforthemotor,andthentheycometogetherandthey
formacrew.”Noonepersonisabletofloathisorherownventure(nopun
intended)becauseaccesstocreditissotight.Themodelworks,butitinvolvesas
manymiddlemenastherearefishermen.
ThelifelongfinancialstruggleoftheNicaraguanfishermenandfarmersis
thestoryofmostunbankedpeople,aroundtwobillionadultsintheworldtoday.
7
Whattheylack—astoreofvaluethatwon’tgetmadcowdiseaseordieofold
age,orapaymentmechanismthatextendsbeyondthevillage—wetakefor
granted.
Financialinclusionisaprerequisiteforeconomicinclusion.Itsrepercussions
extendbeyondfinance.Kimsaid,“Idon’tconsiderfinancialaccessandfinancial
inclusiontobetheendgoal.It’sapathweallhavetowalktogetbetter
education,betterhealthcare,equalwomen’srights,andeconomic
development.”
8
Inshort,financialinclusionisafundamentalright.
Thischapterlooksatopportunitiesformobileandfinancialserviceproviders
andotherbusinessestouseblockchainstounleashtheeconomicpotentialatthe
bottomofthepyramid.We’retalkingbillionsofnewcustomers,entrepreneurs,
andownersofassets,onthegroundandreadytobedeployed.Remember,
blockchaintransactionscanbetiny,fractionsofpennies,andcostverylittleto
complete.Anyonewiththesmallestofassets—say,atalentforembroideryor
music,sparewaterpails,achickenthatlayseggs,amobilephonethatrecords
data,audio,andimages—couldexchangevalue.Thenewplatformalso
eliminatesthepoint-of-accessbarrier.IfyoucanaccesstheInternetonamobile
device,thenyoucanaccessassetswithnoformstofilloutandverylittle
literacy.Theseareseeminglysmallbutincrediblyimportantbreakthroughs.If
wedothisright,blockchaintechnologycouldunleashthebiggestuntappedpool
ofhumancapitalinhistory,bringingbillionsofengaged,prospering
entrepreneursintotheglobaleconomy.
THENEWPROSPERITYPARADOX
Forthefirsttimeinmodernhistory,theglobaleconomyisgrowingbutfeware
benefiting.Ononehand,thedigitalageisbringinglimitlesspossibilitiesfor
innovationandeconomicprogress.Corporateprofitsareballooning.Onthe
otherhand,prosperityhasstalled.Throughoutmodernhistory,individualsand
familiesatthe51stpercentilewereontherise.Despitedepressionsand
upheavals,prosperityfortheseindividuals,andforsocietyasawhole,steadily
increased.Thisisnolongerthecase.Standardsoflivingareevendecliningin
thedevelopedworld.MedianwagesarestagnatinginOECDcountries.And,
accordingtotheInternationalLabourOrganization,youthunemploymentin
mostoftheworldisstuckatabout20percent.“Youngpeople[are]nearlythree
timesaslikelyasadultstobeunemployed,”theILOreported.
9
Inmany
developingnations,thenumbersaresignificantlyhigher.Suchunemploymentis
corrosivetoallsocieties,nomatterwhattheirlevelofdevelopment.Most
citizenswanttocontributetotheircommunity.Anyonewhohasbeenjobless
knowshowiterodesself-esteemandwell-being.Thosewithpowerandwealth
aregettingahead,andthosewithoutarefallingbehind.
Thisnewprosperityparadox,nottobeconfusedwiththeintergenerational
“ParadoxofProsperity”coinedbyeconomistssuchasGilbertMorris,has
befuddledeverypolicymakerintheWesternworld.Oneofthebest-selling
businessbooksof2014,CapitalintheTwenty-FirstCenturybyThomasPiketty,
becamethe#1bestsellerontheNewYorkTimeshardcovernonfictionlistin
2014.Atourdeforceofacademicscholarship,Capitalexplainswhyinequality
isacceleratingandwilllikelycontinuetodosoaslongasthereturnoncapital
exceedslong-termeconomicgrowth.Therichhavegottenricherbecausetheir
moneymadethemmoremoneythantheirworkdid.Hence,theproliferationof
newmillionairesandbillionaires.Buthissolutionforhowtostemgrowing
socialinequality,byimposingawealthtaxontheoneswhoownmostofthe
world’swealth,wassomewhatlessinspiring,ifonlybecausewe’veheardit
before.
10
Indeed,foraslongascapitalismhasbeentheprimarymodeof
production,thedebateabouthowtosharethefruitsmoreequallyhasnotmoved
muchbeyondtheredistributionofwealth,usuallythroughtaxationoftherich
andtheprovisionofpublicservicestothepoor.Advocatesofourcurrent
economicmodelpointtothehundredsofmillionsofpeopleinthedeveloping
world(mostlyinAsia)whohavebeenliftedoutofabjectpoverty,butoften
overlooktheasymmetricbenefitsconferredtotheverywealthyandthe
wideningchasmbetweenthesuperrichandtherestofthepopulationinthose
samecountries.Today,theglobal1percentownshalftheworld’swealthwhile
3.5billionpeopleearnfewerthantwodollarsaday.
Defendersofthestatusquoarequicktopointoutthatmostoftheworld’s
superrichgotrichbycreatingcompanies,notthroughinheritance.However,
behindthesuccessesofafewaresomeverytroublingstatistics.Therateofnew
businessformationisdown.IntheUnitedStates,theshareoftotalfirmsthatare
youngerthanoneyearoldfellbynearlyhalfbetween1978and2011,from15
percentto8percent.
11
Themillennialgeneration,oftcharacterizedas
entrepreneurialrisktakers,isdoinglittletobuckthetrendandmaybe
contributingtoit.ArecentanalysisofFederalReservedatafoundthatonly3.6
percentofAmericanhouseholdsheadedbysomeoneunderthirtyheldastakein
aprivatecompany,downfrom10.6percentin1989.
12
Inthedevelopingworld,thedigitalrevolutionhasdonelittletoclearthe
entrepreneurialpathofredtapeandcorruption.Whereitcostsonly3.4percent
ofper-capitaincometostartabusinessinOECDcountries,itcosts31.4percent
inLatinAmericaandashocking56.2percentinsub-SaharanAfrica.InBrazil,
anentrepreneurhastowaitalmost103daystoincorporatehiscompanyversus4
daysintheUnitedStatesandhalfadayinNewZealand.
13
Exasperatedby
governmentbloatandinefficiency,manywould-bedeveloping-world
entrepreneursinsteadchoosetooperateintheso-calledinformaleconomy.
“ThereareabunchofthingstakenforgrantedintheWest.Propertyrecordsare
fine-tuned,forexample.IntheGlobalSouth,entrepreneurswouldratherthe
governmentnotknowtheyexist.Weneedtomakeidentityaprofitable
proposition,”saidHernandodeSoto.Fornow,stayingintheshadowsfreesthese
entrepreneursfrommeddlesomeandcorruptofficials,butitalsoprofoundly
limitstheirabilitytogrowtheirbusiness,limitsrights,andmakes“deadcapital”
ofmoneythatcouldotherwisebedeployedmoreefficiently.
14
Moreover,even
forthosewhooperatetheirbusinessesintheopen,lawsofmanycountriesdo
notprovideforlimitedliability.Ifyourbusinessfails,you’repersonallyonthe
hookforallliabilities.IfyoubounceabusinesscheckinmanyArabcountries,
yougostraighttojail—“donotpassgo”oranyotherinstitutionsofdueprocess
ontheway.
15
Okay,then,theworldhasalwayshadhavesandhave-nots.Todayfewer
peoplestarvetodeath,ordiefrommalariaorthroughviolentconflict.Fewer
peopleliveinextremepovertytodaythanin1990.
16
Certainemerging
economieshavebenefitedfromoutsourcingofmanufacturingandliberalization
ofeconomicpolicies—Chinabeingaprimeexampleofboth—andthemean
incomeofcitizensinmostdevelopedcountriesincreased.Onbalance,people
arebetteroffthantheyusedtobe,right?Sowhatiftherichjusthappentoown
significantlymore?Shouldn’ttheykeepwhatthey’veearnedthroughtheir
efforts?What’stheproblem?
Pikettypointedatcapitalism.Butcapitalism,asasystemfororganizingthe
economy,isnottheproblem.Infact,capitalismisagreatwaytocreatewealth
andprosperityforthosewhoknowhowtouseit.Theproblemisthatmost
peoplenevergetashotatseeingthebenefitsofthesystembecausetheRube
Goldbergmachineofmodernfinancepreventsmanyfromaccessingit.
Financialandeconomicexclusionistheproblem.Fifteenpercentofthe
populationinOECDcountrieshasnorelationshipwithafinancialinstitution,
withcountrieslikeMexicohaving73percentofthepopulationunbanked.Inthe
UnitedStates,15percentoverfifteenyearsofage,or37millionAmericans,are
unbanked.
17
Financialinequalityisaneconomicconditionthatcanquicklymorphintoa
socialcrisis.
18
In2014,theWorldEconomicForum,amultistakeholder
organizationwhosemembersincludethelargestcompaniesandmostpowerful
governmentsintheworld,arguedthatgrowinginequalityposedthesingle
biggestriskglobally,beatingoutglobalwarming,war,disease,andother
calamities.
19
Blockchaincouldbethesolution.Byloweringbarrierstofinancial
inclusionandenablingnewmodelsofentrepreneurship,thetonicofthemarket
couldbebroughttobearonthedreamsandideasofbillionsoftheunbanked.
ProsperityPurgatory:AnExerciseinFutility
Forcenturies,bankshavereliedonnetworkeffects.Eachsuccessivecustomer,
branch,product,dollarin,anddollaroutincreasesthevalueofthebank’s
network.However,buildingthesenetworkshascomeatacost.Specifically,the
costofacquiringaprofit-turningcustomerhasonlyincreased.Ifaprospect’s
moneywon’tearnitskeep,thebankwon’tbeinterestedinkeepingit.Thus,
bankshavelittleeconomicincentivetowincustomersinthebottomhalfofthe
pyramid.AccordingtoTylerWinklevoss,banksdon’tservemostoftheworld
andhavenoexistingplanstoservethem.However,newtechnologycould
removethatstep.Hesaid,“AlotofAfricancountriesleapfroggedthe
infrastructureoflandlinetelecomswithcellular.Theyskippedthatstep.
Blockchainwillhavethegreatestimpactinareaswherethepaymentnetworks
don’texistorareverypoor.”
20
Blockchainwillpushmanynascentinitiatives,
suchasmobile-moneyserviceproviderslikeM-PesainKenya,ownedby
Safaricom,andmicrocreditoutfitsglobally,intohighgearbymakingthemopen,
global,andlightningfast.
Abankisthemostcommonfinancialinstitution,andsowewilluseitasan
examplehere.Howdoyouopenabankaccount?Ifyouliveinthedeveloping
worldtoday,youwilllikelyhavetovisitthebranchinperson.InNicaragua,
thereareonly7bankbranchesper100,000peoplecomparedwith34per
100,000intheUnitedStates.Nicaragualookswellbankedcomparedwithmany
countriesinAfrica,wheretherecanbefewerthan2branchesper100,000
people.
21
Soyouwillprobablyhavetotravelagooddistancetofindabank.You
willalsoneedtobringagovernment-issuedidentitycard,butthatwillbejustas
difficulttocomebyifyoudon’talreadyhaveone.
Inthedevelopedworld—say,theUnitedStates—youneedtomeetcertain
requirements.Whiletheserequirementsvaryfrombanktobankandstateto
state,youtypicallyneedtodepositandmaintaina$100to$500minimum
balance.Youalsoneedtoproveyouridentity.Banksthatdobusinessinthe
Statesmustcomplywithstringent“knowyourcustomer,”“anti–money
laundering,”and“anti–terrorismfinancing”regulations.
22
Andsotheymustdo
morecomprehensivebackgroundchecksonapplicantsbeforegrantingtheman
account.Ultimately,thebankislessinterestedinevaluatingyourcharacterthan
itisincomplyingwithregulatoryagencies.Thatmeansalaundrylistof
requirements.First,youneedaSocialSecuritycard.Don’thaveone?That’s
usuallyenoughtogetrejected.HowaboutaphotoIDlikeadriverslicenseor
passport?Don’thaveone?You’renotopeningabankaccount.Let’ssayyou
havebothaSocialSecuritycardandphotoID.Thebank,justtobesafe,asksfor
arecentutilitybillasproofofpermanentresidenceorsomeproofofaprevious
bankaccount.Ifyouhappentobenewtotown,orstayingwithfamily,orfrom
anentirelyunbankedregionoftheworld,you’dlikelyfailsomeofthesetests.
Thebankdoesn’twantyouasacustomerunlessitcanconfirmyouridentity
basedonvariouspaperedcredentials.It’snotinterestedinknowingyouasa
well-roundedperson.It’sinterestedinknowingyouasasetofcheckedboxes.
Previousattemptstostreamlinethisprocessforimmigrantsandthepoor,suchas
theNewYorkschemetoallowpeopletousetheircityIDcards,havefailed.
23
TheProsperityPassport:AnExerciseinUtility
Fortunatelyfortheunbanked,blockchaintechnologyisengenderinganewform
offinancialidentity—onenotdependentuponone’srelationtoabankbutrooted
inone’sownreputation.Inthisnewparadigm,being“banked”inthetraditional
senseisnolongeraprerequisite.InsteadofpassingthetraditionalIDtests,
individualscancreateapersistentdigitalIDandverifiablereputationanddeploy
it,inwholeorinpart,indifferentrelationshipsandtransactions.Theblockchain
endowsthisdigitalIDwithtrustandaccesstofinancialservices.Thiscapability
isunprecedentedatamassivescale.JosephLubinofConsenSyssaid,“Weall
havereputation.Itjustisn’teasytouseassocialandeconomicsystemsare
currentlyconstructed.Mostofitisetherealandephemeral.Inthebestcase,itis
fragmentedandyouhavetopresentshallowdocumentationofitanewforevery
venturethatrequiresit.Intheworstcase,billionsofpeopledon’thaveawayof
presentingreputationtoanybodybuttheirimmediatesocialcircle.”
24
Itmightas
wellbeapigoracow.However,withthebasicbuildingblocks,peoplecan
constructdigitalidentitiesthatarenotfragmentedoretherealbutuniversaland
standardized,withrobustattestationsofaspectsofthemselvesandtheir
interactions.TheycansharethesedigitalIDsgranularly—thatis,shareonlyvery
specificinformationabouttheiridentity—tofacilitatemoreinteractionsthatwill
likelyleadtotheirownpersonaleconomicgrowthandprosperity.DavidBirch,a
cryptographerandblockchaintheorist,summeditup:“Identityisthenew
money.”
25
Considerthepossibilities:theunderbankedoftheworldcanenfranchise
themselvesastheyinteractwithmicrolendingoutfits.Potentialvendorsor
lenderscantracktheirusageandrepaymentoftinyloans,previouslyunfeasible,
ontheblockchainratherthanrelyonsomecreditscore.“Onceapreviously
unbankedpersonpaysbackamicroloan,theyareontheirwaytosecuringmore
andlargerloanstobuildtheirbusinesses,”
26
saidLubin.Thisbehavior,when
repeated,addstothereputationscoreoftheborrower.Combinedwithaglobal,
frictionlesspaymentplatform,individualsandsmallbusinessownerscandothe
previouslyimpossible:payaremotevendorformerchandiseorservices,thereby
advancingtheirprospectsintheglobaleconomy.JoyceKimmused,“Whatifwe
couldcreateacreditscoreforwomenbasedontheirhouseholdhistory?”
27
Economicandfinancialfaultlinesoftenrunalongsidegenderlines,makingthis
technologyaboonfortheworld’sdisenfranchisedwomen.Referringtothe
globalpoor,deSotosaid,“It’snotthattheydon’twanttocomeintotheglobal
economy.It’sthatthestandardsandinformationtobringthemintothesystem
arenotinplace.Blockchainisterrificbecauseitgivesusacommonplatformto
bringpeopletogether.”
28
Whatcouldthispersistentreputationmeanforglobalentrepreneurship?If
youhaveareliable,unique,androbustidentity,andyou’redeemedtrustworthy,
counterpartieswillfeelmorecomfortableprovidingyouwithaccesstovalue.
Thisisnotredistributionofwealthbutawiderdistributionofopportunity.Haluk
Kulin,CEOofPersonalBlackBox,said,“Thebiggestredistributionthatisabout
tohappenisnotaredistributionofwealthbutaredistributionofvalue.Wealthis
howmuchmoneyyouhave.Valueiswhereyouparticipate.”
29
Blockchaincan
enableeverypersontohaveauniqueandverifiablereputation-basedidentity
thatallowsthemtoparticipateequallyintheeconomy.Theimplicationsofthis
equalityareprofound.Lubinimaginesafuturewherethe“unbankedand
underbankedwillbecomeincreasinglyenfranchisedasmicrolendingservices
willenableinvestorsacrosstheglobetoconstructdiverseportfoliosofmany
microloansofwhichtheusageandrepaymentcanbetrackedinfulldetailonthe
blockchain,usingBalanc3’s[aConsenSysportfoliocompany]triple-entry
accountingsystem,forinstance.”
30
Inthisnewfuture,whenpeoplerepay
microloans,theyareontheirwaytosecuringmoreandlargerloanstobuildtheir
businesses.
ROADMAPTOPROSPERITY
Financialidentityisthegenesisforawidearrayoffinancialandeconomic
opportunitypreviouslyunattainableformorethantwobillionoftheworld’s
population.Blockchaintechnologyenablespeoplefromallwalksoflifetomap
outtheirownprosperity.Imaginethat,awealthofone’sown—forlarge
numbers,ultimatelybillionsofpeople.
ToolsofAbundance:Themostbasicrequirementstoparticipateinan
economyaretoolslikeamobilephoneandsomekindofInternetaccess,the
portalthroughwhichpeopleinteractwithdifferentvaluesystems.Dr.Balaji
Srinivasan,managingpartneratAndreessenHorowitzandalectureratStanford
University,said,“IfyoucanaccesstheInternetonamobilephone,suddenly
you’reabletoaccessalltheseotherthings.Youcanaccessabankoratleastthe
mechanismsforit.”
31
Blockchaintechnologycreatesawholenewsetof
businessmodelspreviouslyunimaginablethatempowerindividualsaseconomic
agents.
PersistentIdentity:Youcanuseandportidentityintodifferentnetworksto
establishreputationinafinancialtransactionortoplugintodifferentsocial
networks.Suddenly,apignolongerhastobethefamilypiggybank.New
paymentrailsandmeanstostorevalueandtransactwithcounterpartieswill
opennewfrontiers.Indeed,thisloweringofbarrierstofinancialinclusionwill
makeiteasierthaneverforentrepreneursinthedevelopedanddevelopingworld
aliketobuildbusinesses.Thisincludeseverythingfromturningonapayment
mechanism,tohavingareliablestoreofvalue,tousingblockchainsoftwareto
managefinancialstatements.
DemocratizedEntrepreneurship:Undertherightconditions,entrepreneurs
aretheenginesofeconomicgrowthinsociety.Theybringfreshthinkingtothe
marketplaceandfuelthecreativedestructionthatmakesmarketeconomies
prosper.Blockchaintechnologybestowsindividualsandsmallcompanies
anywhereintheworldwithmanyofthesamecapabilitiesoflarger
organizations.Blockchain-basedledgersandsmartcontractslowerbarriersto
startingacompany,expediteincorporation,andcutredtapeparticularlyinthe
developingworld,whereittakesthreetimeslongertoincorporateandcostsfive
timesasmuch.
Blockchainscanautomate,streamline,andotherwisedramaticallyimprove
thethreecomponentsofbusinessbuilding:formation,fund-raising,andsales.
Formationcostswilldropsignificantly,asblockchainisatrusted,knownwayto
incorporateabusiness.Youcanseeownershipandmaintainrecordseasily,
especiallyhelpfulinareaswheretheruleoflawisabsent.Financingacompany
iseasierasyoucanaccessequityanddebtcapitalonaglobalscale,andifyou’re
usingacommondenominator—likebitcoin—youneednotworryabout
exchangeratesandconversionrates.Salesbecomeafunctionofaccessing
anyonewithaconnecteddevice.Buyersdon’tneedacreditcard,localcurrency,
orbankaccount.
Throughsecureandimmutableledgers,entrepreneurswillbeabletoregister
theirbusinessandtitleofcorporateassets;manageinventory,payables,and
receivables;andleverageotherfinancialmetricsthroughtriple-entryaccounting
softwareandotherblockchain-basedapplications,reducingtheneedfor
auditors,taxlawyers,andothervendorswhoweighonsmallbusinesses.
32
Regulatorsmightcutsmallbusinessesabreakforoptingintoatriple-entry
accountingscheme.Thatmeansmoretothebottomlineandlesswastedtime.
Asthecompanygrows,reconcilingcorporateactionsanddocumentationwill
becomelesscomplex.Throughsmartcontracts,anentrepreneurcouldautomate
manyaspectsofacompany’soperations:purchaseorders,payroll,intereston
debt,andfinancialauditsinrealtime.Twonewmodelsforindividual
entrepreneurshipwillgaintraction:
METERINGEXCESSCAPACITY.Fromthecentralizedsharingeconomytothe
distributedmeteringeconomy,individualswillbeabletoloanouttheirspare
beds,wheelbarrows,oxen,andothertangibleandintangibleassetstopeersina
networkbasedonreputationscores.Blockchainenablespreviouslyimpossible
revenuestreamssuchasmeteringWi-Fi,electricitygeneratedfromroof-installed
solarpanels,Netflixsubscriptions,latentcomputingpowerinyourphone,and
otherhouseholdappliances—allthroughmicropaymentsandsmartcontracts.
Theblockchainbecomesanewutilityforindividualstocreatevalueandearn
incomeinnontraditionalways.
MICROMONETIZINGDATA.Parentswhoworkinthehomeandfamily
caregiversofallkindswholabortirelesslyoveryoungchildrenandaging
parentscanatlastmonetizetheireffortsandberecognizedforthevaluethey
delivereveryhouroftheday.Thisisnotadeveloped-worldopportunity
exclusively.Bigcompaniesarelookingforwaystomarkettopeopleinthe
globalSouthbutoftenlacktherightdatatomakebusinessdecisions.
Contractingandlicensingpersonaldatacouldbeagreatopportunitytoadda
newrevenuestreamforayoungentrepreneurwhileheislaunchinghisnew
blockchainIPO.Today,hugedigitalconglomerateslikeFacebookandGoogle
harvestpetabytesofdataaboutbillionsofpeople.WeenterintoaFaustian
bargainwherewegiveupdatainexchangeforcoolservices,butweloseprivacy
anddataintegrityintheprocess.Blockchainturnsconsumersintoprosumers.
Nikemightliketoknowwhatyouateforbreakfast,howoftenyougoforarun,
andwhetheryouarethinkingofbuyingnewworkoutgear.Whynotcontractthat
datainexchangeforNikepointsorrealmoney?Let’sgoonestepfurther:
Insurancecompaniesaresearchingforthebestdatatomakeactuarial
calculations.Yourowndata—howmuchyouexercise,ifyousmoke,whatyou
eat—areveryvaluabletothem.Enterintoalicensingagreementwhereevery
timetheyuseyourdatatomakeanactuarialcalculationandpriceanewproduct,
yougetamicropayment.
33
DistributedOwnershipandInvestment
We’removingintoaperiodofhumanhistorywherebyverylargenumbersof
peoplecanbecomeownersofwealththroughdistributedledgertechnology.
Enablingaccesstotheworld’sfinancialmarketsandthereforetheuniverseof
investmentopportunities,fromconventionalinvestmentstoparticipationinmass
collaborativeventures,microlendingschemes,blockchainIPOs,andreputation-
basedmicrolending,willopenaccesstocapital.Already,crowdfundingis
changingthefaceoffinance.In2012,nonblockchaincrowdfundingcampaigns
raised$2.7billionaroundtheworld,an80percentincreaseovertheyearbefore.
Withdirectpeer-to-peercrowdsourcedblockchainfinancings,thesenumbersare
poisedtogrowmanifold.Individualscancontributesmallamountsofmoney
throughcrowdfundingcampaigns.Imagineacampaignthatengagesamillion
peopleeachgivingadollar.Callitdistributedownership.Notmeaningful,you
say?Augur,thepredictionmarketplatform,raisedmillionsofdollarsinsmall
incrementsfromthousandsaroundtheglobe.Therangeofpossibilitiesisvast.
BlockchainIPOsnotonlycanimprovetheefficacyandefficiencyofraising
money,loweringthecostfortheissuer,theycanalsobebroadlyinclusive,
allowingpreviouslyunimaginablegroupsofburgeoninginvestorstoparticipate.
Todate,therangeofproposalstochangeincomeandwealthdisparityhasnot
reachedbeyondhighertaxesforthewealthyontheoneend,or,atitsmost
extreme,outrightexpropriationbythestate.Insteadofredistributingand
expropriatingwealth,let’simaginehowblockchaincancreateopportunitiesto
sharemoreequallyinthewealthcreatedbysociety.
REMITTANCES:THESTORYOFANALIEDOMINGO
AnalieDomingo
34
hasbeenworkingasanannyandhousekeeperfortwenty-five
years.Oneofmorethan200,000Filipino-bornpeoplelivinginToronto,
35
her
storyisfairlytypical:SheleftthePhilippinesasayoungwomantosettlein
Canadawithnosavings,noformaleducation,andverylittleknowledgeofher
adoptivecountry.Analiehasworkedveryhardandhascarvedoutalifefor
herselfandherfamily.Tenyearsago,sheusedhersavingstoputadown
paymentonahouse,aremarkablefeatasshehadbeendutifullysendingmoney
toherfamilyinthePhilippinesforthepreviousthreehundredmonths.Analie
senthomesomuchmoneythathermother,nowinherseventies,wasableto
purchaseahomeofherowninManila.
Analiegraciouslyagreedtoletusjoinheronpaydaytodocumenther
experience.OnFridayafternoon,Analiegotherpaycheck,handwrittenbyher
employer,andwalkedittothelocalbank.Thistookfifteenminutes;twenty
minutesifyouincludethelineupattheteller.Aftershedepositedit,she
withdrew$200Canadian.Coldhardcashinhand,shewalkedablocktocatcha
localbus.Insteadofheadingtowardherhome,shewenttwomilesinthe
oppositedirectionandgotdroppedoffatwhatcanonlybedescribedasabad
neighborhood.Shewalkedforanotherfourblocksandfinallyarrivedatthe
“financialinstitution”fromwhichshewouldsendthemoney:aniRemitcounter
atthebottomofahousingblockinToronto’sSt.JamesTown—oneofthe
poorestandmostnotoriouslydangerousneighborhoodsinCanada.Because
manypeoplewhouseiRemit’sservicesareunbanked,thecompanyhasbegun
offeringotherfinancialservices,suchascheckcashing.Analiefilledoutapaper
form,asshehasdonehundredsoftimesbefore,andhandedoverherhard-
earnedmoney.Fora$200wire,Analiepaidaflatfeeof$10.Onthereceiving
end,herseventy-year-oldmotherenduredasimilarlytaxing(andequally
ridiculous)trektoreceivethemoney.Ofcourse,shehadtowaitthreetofour
daysbeforegoingtothebank,theaveragetimethesepaymentstaketoget
processed.Analiewalkedbacktothebusstop,boardedthebus,asubway,and
anotherbus,andeventually,onehourlater,reachedherhome.
Thecostofsendingthatremittance,$10,isequalto5percentofthetotal
value.Inaddition,thereistypicallyaspreadontheexchangerateofaround1to
2percent.Ataround7percentthisisaslightdiscounttotheinternational
averageof7.68percent.
36
Thattheyareboth“banked”andstillhavetogo
throughthisprocessmakesthewholefarcicalroutinemoreegregious.Thehard
costfailstocapturetheall-incost.Forexample,thetimevalueofthetwohours
Analiewasteddoingthisisequaltoanother$40,basedonherwages.Moreover,
shehadtoleaveworkearlybecauseshefeelsunsafegoingtotheneighborhood
whenit’sdark.Forhermother,aseptuagenarianlivinginManila,thephysical
tollonherbodyofmakingthejourneytopickupthemoneyisequally
significant.Thepurchasingpowerofthe$10Analieforwenttomakethe
transactionhappeniscertainlymaterialtoher,butfarmoreforhermother.
WhereasinCanada$10isthecostofamealandbusfare,inManilaitcouldbuy
foodforaweek.Overherlifetime,Analiehaspaidthousandsofdollarsto
intermediariessuchasWesternUniontosendmoneyhome.Eachmonthlyfee
contributestoaglobalhoneypotof$38billioninfeespaidannuallyon
remittances.
37
Remittancesoffundssentbacktotheirhomelandsbypeoplelivingindistant
locationsconnectdiasporasglobally.Diasporasareglobalcommunitiesformed
bypeopledispersedfromtheirancestrallandsbutwhoshareacommonculture
andstrongidentitywiththeirhomeland.
Oneofthefunctionsofmanyoftoday’sdiasporasistoaddressandhelp
solvecommon,globalproblems.Remittancesrepresentoneofthelargestflows
ofcapitaltodevelopingcountriesandcanhaveanenormouslypositiveimpact
onthequalityofthelivesofsomeoftheworld’smostvulnerablepeople.In
somecountries,remittancesareahugeandvitalcomponentoftheeconomy.In
Haiti,forexample,remittancesaccountfor20percentofGDP.ThePhilippines
receives$24billioneveryyearinremittances,or10percentofGDP.
38
AccordingtotheInternationalMonetaryFund,recipientsusuallyspend
remittancesonnecessities—food,clothing,medicine,andshelter,meaning
remittances“helplifthugenumbersofpeopleoutofpovertybysupportinga
higherlevelofconsumptionthanwouldotherwisebepossible.”
39
Remittance
flowstodevelopingnationsareestimatedtobethreetofourtimesaslargeas
foreignaidflows.
40
Thepositiveeffectsofremittancesonthepoorindeveloping
countriesarewellunderstood,yetdespitethisenormouseconomicinjection,
remittancecostsarestillappallinglyhigh.Insomeofthemostexpensive
corridorsbetweennations,feesonremittancescanrunnorthof20percent.
41
Canadaisoneofthelargestnetsendersofremittancesintheworld.In
Ontario,Canada’slargestprovincebypopulationandlargesteconomy,3.6
millionpeopleidentifyasbeingforeignbornandeveryyearbillionsofdollars
leavetheprovinceintheformofremittances.
42
Analie’sstoryisnoteworthy
becauseitisthenorminCanada.
ConsidertheDufferinMall,alsoinToronto.Onmostdaysthemallseesa
steadyflowoftrafficandcouldbemistakenforanyothershoppingcenterin
CanadaortheUnitedStates.ButeveryThursdayandFridayaroundfiveo’clock
intheevening,somethingentirelydifferenthappens.Paychecksinhand,
thousandsofforeign-bornCanadiansdescendonthemalltosendremittances
fromthemall’svariousbanksandforeignexchangedealerstoneedyfamily
membersintheirhomecountries.Acottageindustryofforeignexchangedealers
andWesternUnionoutpostshaspoppedupinconveniencestores,bars,and
restaurantsinthesurroundingareatodealwiththeoverflow.
Oftentimestravelingbybus,streetcar,orsubway,withchildrenintowand
exhaustedfromalongday,TorontoniansspeakingFilipino,Cantonese,Spanish,
Punjabi,Tamil,Arabic,Polish,andotherlanguagesgettothemall,andthen
standinlonglineswaitingforthechancetosendtheirhard-earnedmoneyhome.
Thesedays,mostpeoplepassthetimeontheirsmartphones,chattingover
WhatsApp,SkypingfriendsandfamilyinTorontoandabroad,playinggames,
andwatchingvideos.Moreoftenthannot,ittakesupwardsofaweekforthis
moneytoarriveatitsintendeddestination,atwhichpointsomeoneonthe
receivingendneedstogothroughasimilarlytedious,time-consumingprocess.
What’swrongwiththisscenario?Justabouteverything.Let’steaseoutthe
brightspots.Remember,mostofthepeoplewaitinginlinewereusingsmart
phones,atechnologythatispervasiveinCanadaandincreasinglyubiquitous
globally.Seventy-threepercentofCanadiansownasmartphone,andinToronto
thenumberisalmostcertainlyhigher.Thecountryhasawirelessnetwork
infrastructureamongthebestintheworld,whichmeansthatnotonlycanmost
Canadiansownasmartphone(effectivelyasupercomputer),buttheycanalso
useittoharnessthepowerofthemobileWebinwaysthatwouldhaveseemed
likesciencefictiontwodecadesago.Whydothosepeoplewaitinlinetosend
moneyviaaphysicalpointofsaleusingdecades-oldtechnologyinsteadofwhat
theyhaveattheirfingertips?DollarsarealotlessdataintensivethanHDvideo.
Infact,accordingtoSkype,videocallingconsumes500kilobitspersecond.
43
Sendingonebitcointakesabout500bits,orroughlyoneone-thousandththedata
consumptionofonesecondofvideoSkype!
Bydisintermediatingtraditionalthirdpartiesandradicallysimplifying
processes,blockchaincanfinallyenableinstant,frictionlesspayments,sothat
peopledon’twaitinlineforanhourormore,travelgreatdistances,orrisklife
andlimbventuringintodangerousneighborhoodsatnightjusttosendmoney.
Today,anumberofcompaniesandorganizationsareleveragingthebitcoin
protocoltolowerremittancecosts.Theirgoalistoputbillionsofdollarsintothe
handsoftheworld’spoorestpeople.Theseindustrieshavebeencontrolledbya
handfuloffirmsthathaveusedtheiruniquepositioningandlegacyinfrastructure
toproducemonopolyeconomics.Buttheytooseetheriskfromthistechnology
andthey’rescared.AccordingtoEricPiscini,wholeadsDeloitte’s
cryptocurrencygroup,companiesinthepaymentspacetoday“arereallynervous
aboutwhattheblockchainisactuallydoingtothem.WesternUnion,
MoneyGram,iRemit,andothersareverynervousaboutthedisruptiontotheir
businessmodel.”
44
Theyshouldbe,asthereisanemergingindustryofnewand
disruptivecompaniesthatplantotaketheirplace.
Well,Luke,MyFriend,WhatAboutYoungAnalie?
Therearetwomainobstaclestocreatingablockchain-basedpaymentnetwork
fortheworld’spoor.First,manyofthepeoplesendingthemoneygetpaidin
cashandthoseonthereceivingendliveinapredominantlycash-basedeconomy.
Second,mostpeopleinthedevelopedanddevelopingworldalikedon’thavethe
knowledgeandtoolstouseblockchaineffectively.Whilecashmayverywellgo
thewayofthedodo,untilemployersstartbeamingvaluetosmartwalletsinthe
developedworld,andtinystreetsidemerchantsinManila,Port-au-Prince,and
Lagosstartacceptingdigitalpayments,wewillstillneedhardcurrency.Western
Unionunderstandsthat,andthat’swhyitisstillveryrelevanttoday,withmore
than500,000agentsallovertheworld.
45
Ifyou’relookingtoexchangeyour
remittanceforcash,youroptionsarelimited.WesternUnionwouldn’tbe
effectiveifithadonlyoneagent.Itsnetworkhasallowedittomaintaina
monopolypositionontheentiremarketfordecades.Therehavebeenfewifany
companieswithaseamless,easy-to-use“killerapp”technology.Untilnow.
EnterAbra,andothercompanieslikeit.WithanamelikeAbra,onewould
expecttoseealittle“cadabra,”andthecompanydoesnotdisappoint.Abrais
buildingaglobaldigitalassetmanagementsystemonthebitcoinblockchain.Its
statedmissionistoturneverysmartphoneintoatellerthatcandispense
physicalcashtoanyothermemberofthenetwork.Wewantedtotestwhether
thissolutionimprovedAnalie’sexperience.
AnalieandhermombothdownloadedtheapptotheirAndroidsmart
phones.Analie’sbalancetostartwasinCanadiandollars.Attheclickofa
button,Analieinitiatedthetransfertohermom.Shegotit,inpesos,almost
instantly.Atthispoint,hermomhadthechoiceofkeepingpesosonherphone
asastoreofvalueandchoosingtospendthematagrowingnumberof
merchantsthatnowacceptAbraasapaymentsystem.Bycreatingapayment
mechanismandstoreofvalue,Abraeffectivelydisplacestheconventional
bankingsystem’stwomostessentialroles:paymentsandvaluestorage.This
aloneisarevolutionaryconcept,buthere’swhereitgetsreallyinteresting:Mom
wantscash.Shepaysherrent,buysherfood,andmanagesvirtuallyallother
expensesincash.ShecheckstheappandnoticestherearefourotherAbrausers
withinafour-blockradiusofher.Shemessagesthemalltoseewhowill
exchangeherdigitalpesosforphysicalpesosandatwhatprice.Thefourcome
backtoherwithdifferent“bids”fortheirservices.Onepersonwilldoitfor3
percent,anotherfor2percent,andtwomorefor1.5percent.Momdecidestogo
withthetelleroffering2percent—notbecauseit’sthecheapestbutbecausethis
tellerhasafive-starratingandhasagreedtomeetherhalfway.Theymeetand
sheswapsherAbrapesosforphysicalpesos,thetellermakeshiscommission,
andtheybothwalkawayhappy.Abratakesa25-basis-pointfeeonconversion.
Theentireprocess,frommoneyleavingTorontototheFilipinorecipient
holdingcash,takeslessthananhourandcosts25basispointsnet,inclusiveof
foreignexchangeandallothertransactioncosts.WhereaseveryWesternUnion
transactionrequiresuptosevenoreightintermediaries—correspondingbanks,
localbanks,WesternUnion,theindividualagents,andothers—theAbra
transactionrequiresonlythree:twopeersandtheAbraplatform.“Igetitnow.
That’sreallycool!”saidAnalie,ecstatically.
46
ForAbratoscaleglobally,itmustaddresstwocorechallenges.First,the
networkrequiresacriticalmassoftellerstomaketheserviceconvenient.
Analie’smomwon’tuseitifthenearesttelleristwentymilesaway.Abra
understandsthis,anditispresigningtellers—atlastcountmanythousandsinthe
Philippinesalone—whoarereadytotransactwhenthingsgolive.Second,the
modelworksontheassumptionthattellersandcustomerswillabidebytheir
commitmentwhentheytransferdigitalforphysicalcurrency.Thisislessofa
concern.BusinesseslikeAirbnb,LendingClub,andZipcarhavedebunkedthe
myththatindividualswillnottrustoneanother.Indeed,forAbraCEOBill
Barhydt,thestaggeringgrowthinthenumberofso-calledsharingeconomy
companiesconvincedhimthiswasn’tanissue.“Peoplearewillingtotrusteach
otherfasterthanthey’rewillingtotrustaninstitution,”hesaid.
47
Thesmartphoneiskeytoallofthis.Inthesamewaythesmartphone
allowsyoutorentyourapartmenttosomeoneelseorrentyourcartosomeone
elseorprovideridesharingtosomeoneelse,itcanalsobeusedasanATM.
Barhydtsaid,“It’samazingwhatpeoplearewillingtodoinasharedeconomy
modelandthey’rejustnotdoingitformoneyyet,maybewiththeexceptionof
peer-to-peerlending.”Moreover,hesaid,“It’smoreimportanttousthatyou
trusteachotherratherthanAbra.Ifyoutrusteachother,it’shighlylikelythat
you’regoingtogettoknowAbra,andthatyou’regoingtolikeitandyou’re
goingtohaveagoodexperience,”andultimatelytrusttheplatform.
48
Abraisnotaremittanceappbutinsteadanewglobalplatformforvalue
exchangethatcombinesinequalmeasurethedistributed,trustlessblockchain
network,thepowerofsmartphonetechnology,andtheveryhumaninclination
towanttotrustpeersinanetwork.Byofferinguserstheabilitytostorevaluein
traditionalcurrencies,transmitvalueacrossthenetwork,andalsopayata
growingmerchantnetwork,AbratakesonnotonlyWesternUnion,butalsothe
creditcardnetworks,likeVisa.AccordingtoBarhydt:
ThesettlementrailsforaWesternUniontransaction,andthesettlement
railsforaVisatransaction,areverydifferent.Butthesettlementrails
foranAbratransactionthat’susedforbothperson-to-personpayment,
aswellasperson-to-merchantpayments,areexactlythesame....We
havecomeupwithasinglesolutionthatworksdomesticallyorcross-
border,andthatcanbeusedforbothperson-to-personpaymentsand
person-to-merchantpaymentsforthefirsttime.
49
Abramighteventuallybecomeaglobaljuggernaut,rattlingthewallsofthe
biggestfinancialinstitutionsintheworld.Butfornow,it’sanelegantandsimple
solutiontoanimportantglobalproblem.Withremittancestoppinghalfatrillion
dollarsnextyear,themarketopportunityisnothingtosneezeat.
BLOCKCHAINHUMANITARIANAID
CanblockchainfundamentallytransformhowNGOs,governments,and
individualdonorsdeliverforeignaid?Hundredsofbillionsofdollarsofaidflow
annuallyintodevelopingnations,yetthemacroeconomiceffectsofaidarenot
alwaysclear.
50
Thereisampleevidencetosuggestthatcorruptofficials,local
strongmen,andotherintermediariesstealmuchofitlongbeforeiteverreaches
itsintendedsource.Moretroubling,accordingtotheJournalofInternational
Economics,an“increaseingovernmentrevenuesmaylowertheprovisionof
publicgoods.”Thereportconcludedthat“largedisbursementsofaid,or
windfalls,donotnecessarilyleadtoincreasedwelfare.”
51
Organizationalbloat
andleadershipcorruptioncombineforlotsofwasteandgreaterdisparity
betweenhavesandhave-notsinthepoorestcountries.Thisistruefordirect
foreignaidfromgovernmenttogovernmentbutalsoforNGOsthatputbootson
thegroundinhard-hitplaces.
Wetouchedbrieflyonthequestionofforeignaidinourintroduction.Let’s
exploreitfurther.RecallthattheRedCrosscameunderfireintheaftermathof
the2010HaitiearthquakeafterastudyconductedbyProPublica,an
independent,not-for-profitnewsorganization,andNationalPublicRadiofound
theorganizationsquanderedfundsanddidnotfulfillmanyofitscommitments
suchasbuilding130,000newhomes.Itbuiltonlysix.
52
Initsdefense,theRed
CrossarguedthatHaiti’sshoddylandtitleregistryhindereditsefforts:nobody
couldfigureoutwhoactuallyownedtheland.Asaresult,theRedCross
improvisedalessdesirablesolution.Couldablockchain-basedlandtitleregistry
improvethissituationbyprovidingcleartitleandperhapspreventunlawful
expropriation?
Foreignaidisperhapstheclearestexampleoftheineptitudeofmany
governmentsandtherent-seekingbehaviorofunethicalintermediaries,andis
thusexcellentgroundstoexploreblockchainsolutions.The2010Haiti
earthquakewasoneofthemostdevastatinghumanitariancrisesofthepast
hundredyears.
53
Whilethegovernmentwasparalyzedandthecrisisragedon,
thousandsof“digitalhumanitarians”convergedontheInternettohelpfirst
responderscollect,triage,andvisualizepleasforhelpfrommobilephonesof
devastatedHaitians.Originallyformedonlinebylike-mindedvolunteers,these
adhocgroupsbecameincreasinglyorganizedandeffectiveamidthecrisis.One
inparticular—CrisisCommons—madearealdifference.CrisisCommons
exemplifiesaglobalsolutionnetwork,anemergingnonstatenetworkofcivil
societyorganizations,companies,andindividuals,collaboratingtosolveamajor
problem.Thedigitalrevolutionhasenablednewnetworkstoconnectand
collaborateacrossbordersandcansolveproblemsandenableglobalcooperation
andglobalgovernance.TheInternetmakesallthispossible.Neverbeforecould
peopleorganizecollectivelytocreateapublicgoodastheydidinHaiti.This
informationlayeroftheInternetprovedvital—providingcriticalconnections,
know-how,anddataforpeopleinneedandvolunteerorganizationsalike.
Imagineiftherewasalsoavaluelayer.Whatkindofpossibilitiescouldthat
enable?
Theblockchaincanimprovethedeliveryofforeignaidintwoways.First,
bydisintermediatingthemiddlemenwhoactasconduitsoflargeaidtransfers,it
canreducethechronicproblemofoutrightmisappropriationandtheft.Second,
asanimmutableledgeroftheflowoffunds,itcompelslargeinstitutions,from
aidgroupstogovernments,toactwithintegrityandabidebytheircommitments.
Iftheydon’t,peoplewillbeabletoseetheirmalfeasanceandholdthemto
account.
OnecouldeasilyimagineUNICEFortheUN’swomen’sinitiativeusingthe
blockchaintogetfundingdirectlytowomenandchildrenwithouthavingtogo
throughlocalpowerstructures.Individualsinpoorcountriescouldsignupfor
certainbenefitsthroughadistributedledgermanagedbyanetworkofdifferent
aidgroupsactingasnodesonthenetwork.Whenparticularaidisdelivered—
say,vaccinationsfromtheRedCrossorschoolsuppliesbyUNICEF—those
“transactions”canbetime-stampedontheledger.Thiswouldreduceorperhaps
preventaidgroupsaccidentallydoublespendingonparticularpeopleor
communities,thusspreadingthebenefitsofaidmoreequitably.
Indeed,UNICEFhasbegunexploringcryptocurrencies.InJune2015,
UNICEFannouncedthelaunchofUnicoin,adigitalcurrencythatchildrencan
“mine”bysubmittinganinspirationaldrawingtotheprogram.Thecoinsare
thenexchangedforanotepadandpencil.
54
Thisisasmallstart,butthe
opportunitiesarelimitless.It’snotfartoimaginethehypotheticalweposedin
chapter1—orphanagesinvillagesallaroundthedevelopingworldworkingwith
UNICEFtosetupaccountsforeachchildfromthemomenttheyarrive.
Donationscouldbesplitonaproratabasisintoeachkid’spersonalindividual
account.Governments,strongmen,andothercorruptofficialssimplycouldn’t
accessit.Thepoorestandmostvulnerablechildrenintheworldwouldhavethe
fundstostartalifewhentheymoveintoadulthood.Thisisattainablewith
blockchain.
Naturaldisasterrelieforprovisionsforthepoorcannotallbepeertopeer,of
course.Oftentimes,institutionsarenotonlydesirablebutalsoessential.Butthe
blockchaincanradicallyimprovethetransparencyofhowthoseorganizations,
andotherinstitutionsintheforeignaidvaluechain,function.Everydollar
donatedtotheRedCrosscouldbetrackedfromitsstartingallthewaythrough
thevaluechaintotheindividualitdirectlybenefits.Recallourhypotheticalin
chapter1—theRedCrosscouldruncrowdfundingcampaignsforeachofits
mostimportantinitiatives—deliveringmedicalaidandfightingthespreadof
disease,waterpurification,therebuildingofhomes—andwhenyoudonateyou
wouldknowwhetheryourdollarwenttoaplankofwood,agallonofwater,ora
gauzeBand-Aid.Iffundswentmissing,thecommunitywouldknowandcould
holdtheseorganizationsaccountable.Smartcontractscouldbeemployedthat
holdtheaidgroupsthemselvesaccountable.Thefundsformajorprojects—from
housinginitiativestotheimplementationofawaterpurificationscheme—could
simplygointoescrowandbereleasedonlyafterthesuccessfulcompletionof
keymilestones—securingtitleforasite,importingrawmaterials,signinga
contractwithalocalsupplier,buildingthefinishedproduct,installingacertain
numberofcleanwateraccesspoints—isachieved.Theresult?Radically
improvedtransparencyandaccountabilityinthedeliveryofforeignaid,andthus
significantimprovementsintheendresults.
Foreignaidisthesecond-largestfundtransferfromdevelopedtodeveloping
nations,afterremittances.Blockchaintechnologycanenabletransparency,
accountability,andmoreefficientoperationsforwell-meaningNGOsandbetter
deliveryofcriticalservicesintimesofcrisisandinnormalcircumstances.Of
course,thereareamultitudeofimplementationchallenges—thingsthatmustbe
overcome.Peopleonthegroundwillneedtoknowhowtousethistechnology.
Mobilephonenetworkscouldfailinthemidstofacrisis.Craftycriminal
elementsandcorruptgovernmentsmightstillfindwaystodefraudthepoorand
destitute.Butarethesereasonsnottoexplorethistechnology?No.Thesituation
todayisdysfunctionalandinmanycasesplainlybroken.Empowering
individualsandholdingaidgroupsaccountablewillmeanmoreaidinthehands
oftherightpeople.Alleviatingpovertyandaddressingcatastrophiccrisesisthe
firstrungoftheladdertoglobalprosperity.Let’stakeachanceonblockchain.
Microfinance:Peer-to-PeerAidwithPicopayments
Microfinanceisanindustrythattranscendsbothfinancialservicesand
developmentaid.Ratherthandeliveringaidfromthetopdown,microfinance
institutions(MFIs)trytoempowerindividualstosave,invest,andbuildsmall
businesses.Moreoftenthannot,theytaketheformofcommunalsavingsco-ops,
wheremembersofthecommunitycometogethertopooltheirfundsandloan
themouttooneanotherforshort-termneeds.Whenimplementedandmanaged
properly,microfinanceoutfitscandeliverarealbenefittostruggling
communities:theyreducechronichunger,increasesavingsandinvestment,and
inmanycasesempowerwomen.
55
However,therearesomeproblemswithMFIstoday:First,thereisverylittle
oversightintohowtheyarerunandoccasionallytheyenablepredatoryloansand
coerciveloanrecoverymethods,strainingcommunitiesandaddingtotheir
desperation.Second,inlightofthis,governmentsindevelopingcountrieshave
foundthatthebestwaytocurbbadbehavioristooutlaworseverelyrestrict
MFIsaltogether,aswasthecaseinIndiain2010,followinganMFI
controversy.
56
Third,fundsdon’talwaysendupintherighthands.Thereisno
waytoensurethatthecommunitymemberwhoneedsthemoneythemost
receivesit.Fourth,theyarestilllargelyregional,limitingbothfundsandalso
opportunitytoinvestandsave.
So,peoplewhoareworkingonpovertywillaskthemselves,wheredoesthe
blockchainfitinthemixoftools?Howcanitimproveonwhatwe’redoing?
First,itwillimproveadministrativeaccountability.Aswithcorporate
transparency,donorswillbesimilarlyattractedtoanynonprofitoutfitthatuses
theblockchainforgreatertransparencyandaccountability.Additionally,if
microloansarerecordedtotheblockchainandcustomersofanMFIaregranted
permissiontoaccessthem,thentheycanholdthoseoutfitsmoreaccountablefor
badbehavior.Whatwould-beborrowerorsaverwouldchoosetheopaqueand
murkywhenshecanchoosetheopen?
Second,itcanmeanbetterprotectionofwomenandchildren.Throughsmart
contracts,fundscanbedonatedintoescrowaccounts,accessibleonlybywomen,
say,foraccessingfood,feminineproducts,healthcare,andotheressentials.The
mencan’ttakeitoutoftheirhandstobuycigarettesorbooze,ortogamble,
whichcanbeapersistentproblemwithmoneyfromsavingsormicrofinance.
Third,itwillenablepeopletosourcefundsandopportunityworldwide,and
willattractdonorsworldwide.Communitiesaretypicallylimitedbygeography
inwhichMFItheyuse.Inthefuture,awould-beborrowercouldgoonlineand
sourcethebestbidsfromanumberofpotentiallenders,findingtheonewiththe
bestrates,terms,andreputation.FormalMFIswillcontinuetoexist,ofcourse,
buttherewillbeeasierwaystoconnectpeersthroughblockchainthatwillmake
themlessnecessary.
Finally,blockchainpaymentrails,suchasbitcoin,arebasicallytailor-made
forsmall,disenfranchisedborrowersbyenablingtinypayments(picopayments,
wecallthem)andbydroppingcostsclosetozero.Inaworldwhereeverypenny
counts,usersshouldbeabletopaybackloans,withdrawfunds,andsaveintiny
increments,allofwhichwasfarmorechallenginginapreblockchainworld.
Theyshouldalsobeabletodoitinstantlyandefficiently,giventhatdespite
abjectpovertyinmanypartsoftheworld,cellphonepenetrationandInternet
connectivityarebecomingcommoditized.
SAFEASHOUSES?THEROADTOASSETOWNERSHIP
LandtitleregistrationiswhatHernandodeSotoreferredtoasanonmarketed
transaction,aneconomicexchangegenerallyinvolvingalocalgovernment.
Nonmarketedtransactioncostsincludetheresourceswastedbywaitinginline,
trackingdownownership,completingandfilingpaperwork,cuttingthroughred
tape,resolvingdisputes,greasingthepalmsofofficialsandinspectors,andso
on.
57
Thesecostsarerampantinpooreconomieswheresystemsareweakand
governmentofficialsareknowntobehavewithoutintegrity.Hondurasissucha
place,thesecond-poorestcountryinCentralAmericawithanextremelyunequal
distributionofincome.Theeconomicdownturnof2008stymiedtheinflowof
remittances,andamilitarycoupoustedthedemocraticallyelectedManuel
Zelayain2009.Thecoupwasbackedbyoneoftheregion’slargestlandowners,
apalmoiltycoonwhobenefitedsignificantlyinearlierlandgrabsthatcoerced
Aguáncampesinostoselltheirlandtitles.
58
Sincethemid-1990s,theWorldBankandotherglobalNGOs
59
havepoured
$125.3millionplustechnicalexpertiseintoHondurasfordesigningand
managingland-relateddevelopmentprojectsthatwouldacceleratethecountry’s
growth.
60
Wecameacrossplanstoincorporatespatialdatainfrastructuresthat
wouldsupportthegeotaggingofdataonlandandnaturalresourceownership
andusage,climaticandnaturalhazards,andsocioeconomicconditionsthat
municipalitiescouldusetoinformstrategicplanningandinvestment.Therewas
alsomentionofintegratingdatabasesoflandprojectswithdatabasesof
environmentalanddisastermanagementprojectsatnationalandlocallevels.
61
Veryambitious.
Theproblemisthattherearestillallegationsofpervasivecorruptionin
propertyregistry,landsales,anddisputeresolution,includingaccusations
againstthemiddlemen,judges,andlocalbureaucrats.AccordingtotheOfficeof
theU.S.TradeRepresentative,thepropertyregistrationsystemisstillhighly
unreliable.
62
Householdsinruralvillagesweresystematicallypassedoverduring
landtitleregistrationofresidences,usuallytheirmostvaluableasset,becausethe
governmentlimitedtheWorldBank’sjurisdictiontourbanzones.Inruralareas,
thecash-strappedcampesinosbenefitedleastfromlandadministrationprograms.
RuralpovertyhasnotdecreasedinHondurassince1998.Ambiguityand
corruptionmanifestthemselvesintitledisputesalloverthedevelopedworld.If
Honduraswastosufferacatastrophicnaturaldisaster,asHaitididin2010,aid
organizationsliketheRedCrosswouldbesimilarlyhamstrunginuntanglingthe
messoftitlestodeliversafe,durablehousing.
“Whatiftherewasauniversalledgerthatcouldincludeallthesedataand
infusetrustintoahighlyuntrustworthysituation?Blockchainseemstobe
particularlygoodathandlingtransactions,whichnoneoftheothersystems
necessarilyare,”saiddeSoto.“Thefactispoorcountriesarebynaturevery
corrupt,andsohavingyourtransactionledgerineverynodewithsafety
proceduresmakesthesystemefficient,cheap,andfast,butitisalsothekindof
thingthatthepoorwanttoobecauseitprotectstheirrights,”headds.
63
Here’s
howitworks:Theblockchainisanopenledger,meaningthatitcouldresideon
thedesktopsoftheHonduranofficialswhoneededtoreferenceit,themobile
devicesoffieldworkerswhoinputdata,andcitizenswhowanttomaintaina
copy.It’sadistributedledger,meaningthatnoneofthesepartiesownsit,andit’s
aP2Pnetwork,meaningthatanybodycouldaccessit.Injurisdictionslike
Honduraswheretrustislowinpublicinstitutionsandpropertyrightssystemsare
weak,thebitcoinblockchaincouldhelptorestoreconfidenceandrebuild
reputation.
That’swhattheTexas-basedstart-upFactomplanstodoincooperationwith
theHonduranregimeandinpartnershipwithEpigraph,atitlesoftwarecompany.
Factom’spresident,PeterKirby,said,“Thecountry’sdatabasewasbasically
hacked.Sobureaucratscouldgetinthereandtheycouldgetthemselves
beachfrontproperties.”Headdedthat60percentofHonduranlandis
undocumented.Thegoaloftheproject,whichhasnotbeensigneddefinitively,is
torecordthegovernment’slandtitlesontheblockchainledger.Kirbytold
ReutersthatHondurascouldleapfroglegacysystemsusedinthedeveloped
worldbydeployingFactom’sblockchaintechnology,anditwouldeventually
makeformoresecuremortgagesandmineralrights.
64
“Documentationfor
ownershipfrompatentstohousesisextraordinarilypaper-based,andthere’sno
reasonitshouldbe,otherthanhistory.Blockchainworkswithanytransactionor
interactionwherepropertyrightsandtimingmatters,”
65
saidKausikRajgopal,
whoheadsupMcKinsey’sSiliconValleyofficeandpaymentspractice.
Attheendofthedaywedon’tknowwhethertheHondurangovernmentwill
enforcelandtitlesregisteredontheblockchainorsustainitsuse.Inprevious
landregistrationattempts,thegovernmenthasbackedawayfromtheadditional
costsofscalingupandincludingmorepeople.Butiftheledgerdeliversreliable,
tamperproofdata,thenNGOscouldgettheadditionaldatatheyneedtoinform
andinfluencepolicydecisionsandgovernance.Ifiteliminatesfiveofthesix
stepscurrentlyrequiredtoregisterlandinHonduras,andcutsthelengthoftime
fromtwenty-twodaystotenminutes,thenthosenonmarketedtransactioncosts
droptonearlyzero.
66
Andperhapsitwouldenablejournalistsandrights
advocatestoshamelargeglobalcorporationsintonotpurchasingorbuildingon
orsourcingtimberorwaterfromlandthathasbeendesignatedfor
environmentalprotectionorhashistoricallybeenusedbythecampesinosor
indigenouspeoplewithoutcompensatingthemfairly.We’rehopeful!
IMPLEMENTATIONCHALLENGESANDLEADERSHIP
OPPORTUNITIES
Blockchaintechnologyisobviouslynotapanaceafortheworld’seconomicand
financialwoes.Technologydoesnotcreateprosperity;peopledo.Thereare
obstaclestoovercomeandopportunitiesforleadership.Thefirstistechnical.
AccordingtoInternationalTelecommunicationsUniondata,therearestill
significantgapsinInternetconnectivity,eitherbecausethetelecommunications
infrastructureispoororbecauseserviceisunaffordable.
67
Thesecondisliteracy.Usingsmartphonesandinteractingonlinerequiresa
workablelevelofliteracy.IntheUnitedStates,18percentofadultsovertheage
ofsixteenreadbelowthefifth-gradelevel,30percenthavelowmathliterary,
68
and43percentoftheseilliterateadultsliveinpoverty.
69
Literacyishighly
uneveninthedevelopingworld.InmanypartsofAfrica,literacyhoversaround
50percent,andtheproblemisevenmoreseverewhencomparingthegenders.
Forexample,inplaceslikeAfghanistan,Niger,SierraLeone,Chad,
Mozambique,andotherpoornations,thegapbetweenmaleandfemaleliteracy
isastaggering20percent.
70
Thethirdiscorruption.Blockchainisapowerfultool,butlikeall
technologies,itisnotinherentlygoodorbad.Peoplecanharnessbrilliant
technologies,fromelectricitytotheradioandthroughtotheInternet,for
benevolentormalevolentgoals.Weneedleadershipfromtheinstitutionsin
societythatcanleverageblockchaintechnologyforgood,suchasaidgroups,
civilsocietyorganizations,companies,andgovernments,rightdowntothe
individualswhoareconnectingtothisvastnetwork.Onlywhenthesechallenges
havebeenmetandovercomewillblockchaintechnologyfulfillitspotentialas
aninstrumentofglobalprosperityandpositivechange.
T
CHAPTER8
REBUILDINGGOVERNMENTANDDEMOCRACY
heRepublicofEstoniaisaBalticstatewithLatviatothesouthandRussia
totheeast.Withapopulationof1.3million,ithasslightlyfewerpeople
thanthecityofOttawa.
1
WhenEstoniaregaineditsindependencefromthe
formerSovietUnionin1991,ithadanopportunitytocompletelyrethinktherole
ofgovernmentandredesignhowitwouldoperate,whatservicesitwould
provide,andhowitwouldachieveitsgoalsthroughInternettechnologies.
Today,Estoniaiswidelyregardedastheworldleaderindigitalgovernment,
anditspresident,ToomasHendrikIlves,willbethefirsttosayso:“We’revery
proudofwhatwe’vedonehere,”hetoldus.“Andwehopetherestoftheworld
canlearnfromoursuccesses.”
2
Estoniarankssecondofallcountriesonthesocialprogressindexfor
personalandpoliticalrights,tiedwithAustraliaandtheUnitedKingdom.
3
Estonia’sleadershavedesignedtheire-governmentstrategyaround
decentralization,interconnectivity,openness,andcybersecurity.Theirgoalhas
beentofuture-proofinfrastructuretoaccommodatethenew.Allresidentscan
accessinformationandservicesonline,usetheirdigitalidentitytoconduct
business,andupdateorcorrecttheirgovernmentrecords.Whilemuchof
Estonia’sworkpredatestheblockchain,thecountryintroducedakeyless
signatureinfrastructurethatintegratesbeautifullywithblockchaintechnology.
Centraltothemodelofe-Estoniaisadigitalidentity.Asof2012,90percent
ofEstonianshadanelectronicIDcardtoaccessgovernmentservicesandtravel
withintheEuropeanUnion.
4
Thechipembeddedinthecardholdsbasic
informationaboutthecardholderaswellastwocertificates—onetoauthenticate
identityandonetoprovideadigitalsignature—andapersonalidentification
number(PIN)oftheirchoice.
Estoniansusethesetovote,review,andedittheirautomatedtaxforms
online,applyforsocialsecuritybenefits,andaccessbankingservicesandpublic
transportation.NoneedforbankcardsorMetrocards.Alternatively,Estonians
candothesamewithmobile-IDontheirmobilephones.In2013,Estonians
submittedover95percentoftaxeselectronicallyandconducted98percentof
bankingtransactionsonline.
ParentsandstudentsuseEstonia’se-Schooltotrackassignments,
curriculum,andgrades,andtocollaboratewithteachers.Estoniaaggregatesin
realtimediversehealthinformationfromvarioussourcesintoasinglerecordfor
eachcitizen,andsotheserecordsdon’tresideonasingledatabase.Each
Estonianhasexclusiveaccesstohisownrecordandcancontrolwhichdoctors
orfamilymembershaveaccesstothesedataonline.
5
Since2005,citizenshaveusedi-votingfortheirnationalelections.Using
theirIDcardormobile-ID,Estonianscanloginandvotefromanywhereinthe
world.Inthe2011parliamentaryelection,citizenscastalmost25percentof
ballotsonline,upfrom5.5percentinthepreviousparliamentaryelection.The
peopleobviouslylikeandtrustthesystem:thenumberwentupagainforthe
2014EuropeanParliamentelectionsinwhichathirdofvotersparticipatedover
theInternetfromninety-eightdifferentcountries.TheEstoniancabinetusesa
paperlessprocessandmakesalldraftlegislationaccessibleonline.Theaverage
lengthofweeklycabinetmeetingshasgonefromaroundfivehourstounder
ninetyminutes.
6
Estoniahasanelectroniclandregistrythathastransformedtherealestate
market,reducinglandtransfersfromthreemonthstoalittleoveraweek.
7
Inthe
lastfewyears,Estoniahaslauncheditse-Residencyprogram,whereanyonein
theworldcanapplyfora“transnationaldigitalidentity”andauthenticationto
accesssecureservices,encrypt,verify,andsigndocumentsdigitally.An
entrepreneuranywhereintheworldcanregisterhisorhercompanyonlinein
fewerthantwentyminutesandadministerthecompanyonline.These
capabilitiescontributetoEstonia’simageasadigitalcountry.
8
Noneofthiswouldworkorbeacceptablewithoutsolidcybersecurity.As
MikeGault,CEOofGuardtime,noted,“Integrityisthenumber-oneproblemin
cyberspaceandthisiswhatEstoniarecognizedtenyearsago.Theybuiltthis
technologysothateverythingongovernmentnetworkscouldbeverifiedwithout
havingtotrusthumans...itisimpossibleforthegovernmenttolietoits
citizens.”
9
Estonia’scybersecurityderivesfromitskeylesssignatureinfrastructure
(KSI),whichverifiesanyelectronicactivitymathematicallyontheblockchain
withoutsystemadministrators,cryptographickeys,orgovernmentstaff.This
capabilityensurestotaltransparencyandaccountability;stakeholderscansee
whohasaccessedwhichinformation,when,andwhattheymayhavedonewith
it.Consequently,thestatecandemonstraterecordintegrityandregulatory
compliance,andindividualscanverifytheintegrityoftheirownrecordswithout
theinvolvementofathirdparty.Itlowerscosts:therearenokeystoprotect,and
nodocumentstore-signperiodically.Accordingtoe-Estonia.com,“WithKSI,
historycannotberewritten.”
10
Clearly,blockchaintechnologyappliesnotonlytocorporationsfixatedon
profitsbutalsotopublicinstitutionsfocusedonprosperityforall,from
government,education,andhealthcaretoenergygrids,transportationsystems,
andsocialservices.Wheretostart?
SOMETHINGISROTTENINTHESTATE
InhisGettysburgAddressin1863,AbrahamLincolnsaidthatsociety’sgreatest
goalwasa“governmentofthepeople,bythepeople,forthepeople.”Twelve
decadeslater,PresidentRonaldReagansaidinhis1981InauguralAddress,
“Governmentisnotthesolutiontoourproblem;governmentistheproblem.”
Manyinthenascentblockchainecosystemagree.Ina2013survey,over44
percentofbitcoinusersprofessedtobe“libertarianoranarcho-capitalistswho
favoreliminationofthestate.”
11
Libertariansofallstripestendtosupportbitcoin.It’sdecentralizedandfree
fromgovernmentcontrol.It’sanonymousanddifficulttotax.Itresemblesgold
initsscarcity,andlibertariansfavorthegoldstandard.It’sapuremarket,driven
bysupplyanddemandratherthanquantitativeeasing.Notsurprising,thefirst
2016presidentialcandidatetoendorsebitcoinforcampaignpaymentwasRand
Paul.
Thelibertarianbenthasgivenopponentsofdigitalcurrenciesfodderfor
dismissingblockchaintechnologiesoutright.JimEdwards,foundingeditorof
BusinessInsiderUK,wroteofthelibertarianparadisehecalledBitcoinistan,a
countrylikeSomalia“withaslittlegovernmentinterferenceaspossible,ina
marketfreeofburdensomelawsandtaxes.”Hedescribedtheparadiseas“atotal
nightmare...characterizedbyradicalinstability,chaos,theriseofaboss-class
ofcriminalswhoassassinatepeopletheydon’tlike,andamasshandoverof
wealthtoaminorityevensmallerthantheonepercentthatcurrentlylaudsitin
theUnitedStates.”
12
Certainly,weliveinacrisis-rackedworld.“Theworldhasnotseenthis
muchtumultforageneration.Theonce-heraldedArabSpringhasgivenway
almosteverywheretoconflictandrepression,”wroteKennethRoth,executive
directorofHumanRightsWatch,foundedinthe1970stosupportcitizengroups.
“Manygovernmentshaverespondedtotheturmoilbydownplayingor
abandoninghumanrights,”usingtheInternettospyoncitizens,usingdronesto
dropexplosivesoncivilianpopulations,andimprisoningprotestersatmega
publiceventsliketheOlympics.
13
That’sthewrongresponsetoturmoil,accordingtorenownedPeruvian
economistHernandodeSoto.“TheArabSpringwasessentiallyandstillisan
entrepreneurialrevolution,peoplewhohavebeenexpropriated,”saiddeSoto.
“Basically,it’sahugerebellionagainstthestatusquo,”andthestatusquois
serialexpropriation—therepeatedtramplingofcitizens’propertyrightsbytheir
governmentsuntiltheyhavenochoicebuttoworkoutsidethesystemtomakea
living.
14
Sotramplingmorerightsistheworstpossibleresponsebecauseitpushes
morepeople—suchasjournalists,activists,andentrepreneurs—outsidethe
system.Duringthepasttwentyyears,voterturnouthasdroppedinmostWestern
democracies,includingtheUnitedStates,theUnitedKingdom,France,
Germany,Italy,Sweden,andCanada.Inparticular,youngpeoplearelookingto
bringaboutsocialchangeoutsidethesystem,certainlynotbyvoting.Most
AmericansthinktheirCongressisdysfunctionalanddeeplycorrupt.Andfor
goodreason:asinmanycountries,U.S.politiciansarebeholdentowealthy
contributorsandinterestgroups,andmanymembersofCongressgoonto
becomelobbyists.Caseinpoint:92percentofAmericanswantbackground
checksofpeoplebuyingguns,buttherichandpowerfulNationalRifle
Associationthwartsanylegislationtoeffectchange.Somuchfora“government
ofthepeople,bythepeople,forthepeople.”
Themorecitizensdon’tfeeltheirpoliticalinstitutionsreflecttheirwilland
supporttheirhumanrights,themoretheseinstitutionsoversteptheirauthority,
themorecitizensquestionthelegitimacyandrelevanceoftheinstitutions.
PoliticalsociologistSeymourMartinLipsetwrotethatlegitimacyis“the
capacityofapoliticalsystemtoengenderandmaintainthebeliefthatexisting
politicalinstitutionsarethemostappropriateandproperonesforthesociety.”
15
Andincreasinglyyoungpeoplelooktobringaboutchangethroughmeansother
thangovernmentsandevendemocracy.Thebumpersticker“DON’TVOTE!IT
ONLYENCOURAGESTHEM”tellsthestory.
“Forindividuals,itmightnotbedesirableforthemtobeinasearchable,
verifiabledatabaseofrecordedhistorythatgovernmentscouldpotentiallyuseto
exploitorsubjugatepeople,”deSotosaid.“Thelegislationofmostofthe
countriesintheworldissobadlydone,sounwelcoming,thatthecostofcoming
intothelegalsystemdoesn’tmakesensetopoorpeople.Andacountrywithtoo
manypooranddisconnectedpeoplecausestoomanyproblems.”
16
Aslegitimacyfades,libertarianismascends.Butit’snottheanswertowhat
ailsthebodypolitic.Inthistroubledworld,weneedstronggovernments,and
onesthatarehighperformance,effective,responsive,andaccountableto
citizens.
Whatshouldgovernmentsdo?“Build,streamline,andfortifythelawsand
structuresthatletcapitalismflourish,”deSotowroteinTheWallStreetJournal.
“Asanyonewho’swalkedthestreetsofLima,TunisandCairoknows,capital
isn’ttheproblem—itisthesolution.”
17
Sowhat’stheproblem?“Gettingtheir
peopleidentified,”hetoldus.“Thereisnowayagovernmentcangoinand
forcepeopleinsidethesystem.SoIthinkthatgovernmentsallovertheworld
rightnowarewillingtoturnthesystemaround.”
18
That’swheretheblockchaincomesin.Thedesignprinciplesofthe
blockchainshoulddrivethistransformationasitsupportsandenableshigher
levelsofthefollowing:
Integrity.Torebuildthepublic’strustinpoliticalinstitutions,elected
officialsmustbehavewithintegrity.Trustmustbeintrinsictothesystem,
encodedineveryprocess,notvestedinanysinglemember.Becausethe
blockchainsupportsradicaltransparency,itisbecomingcentraltorebuilding
trustbetweenstakeholdersandtheirrepresentatives.Ongoingtransparencyis
criticaltomaintainingthisrelationship.
Power.Everyonehasarighttotakepartinthegovernment,directlyorby
voting.Whoeveriselectedmustconductaffairsinthefulllightofdayasapeer
amongpeers.WiththeInternet,citizenstookmoreresponsibilityfortheir
communities,learnedfromandinfluencedelectedofficialsandviceversa.With
blockchain,citizenscangoonestepfurther:theycanadvocateforsealing
governmentactioninthepublicrecordinanunalterableandincorruptibleledger.
Notjustchecksandbalancesamongthepowerfulfewbutbroadconsensusof
themany,forexample,toeffectbackgroundchecksonpotentialgunowners.
Value.Votesmusthavevalue.Thesystemmustaligntheincentivesofall
stakeholders,beaccountabletocitizensratherthanbigmoney,andinvesttax
dollarswisely.Themachineryofgovernmentmustbehighperformance,better
andcheaperwithtechnology.
PrivacyandOtherRightsPreserved.Nospyingoncitizens,noarbitrary
interferencewithprivacy,family,orhome,noattacksuponanyone’shonoror
reputation.Noarbitraryseizureofproperty—realestateorintellectualproperty
suchasthepatentsofinventors—withoutcompensation.Nocensorshipofnews
organizations,nointerferencewitheffortstoassemble.Peoplecanregistertheir
copyrights,organizetheirmeetings,andexchangemessagesprivatelyand
anonymouslyontheblockchain.Bewareofanypoliticianwhoarguesfortrade-
offsbetweenpersonalprivacyandpublicsecurity.Remember,it’safalse
dichotomy.
Security.Everyonemusthaveequalprotectionofthelawwithout
discrimination.Noarbitrarydetentionsorarrests.Noonepersonorgroupof
peopleshouldliveinfearoftheirowngovernmentorlawenforcementagencies
orbesubjectedtocruel,inhumane,ordegradingtreatmentfrommembersof
thoseagenciesbecauseoftheirrace,religion,orcountryoforigin.Membersof
policeforcescan’twithholdevidenceofundueuseofforce,andevidencecan’t
gomissing.Itwouldallbeloggedandtrackedontheblockchain.
Inclusion.UsingtheInternet,citizensbecamemoreinvolved,learnedfrom
oneanother.Withtheblockchain,thesystemcancost-effectivelyengageall
citizens,recognizeeveryoneasapersonbeforethelaw,andprovideequalaccess
topublicservices(e.g.,healthcare,education)andsocialsecurity.
Technologyisapowerfultoolbutitalonecannotachievethechangewe
need.Inthespiritofthesaying“Thefutureisnotsomethingtobepredicted,it’s
somethingtobeachieved,”let’sreinventgovernmentforaneweraoflegitimacy
andtrust.It’stimetostopthetinkering.
HIGH-PERFORMANCEGOVERNMENTSERVICESAND
OPERATIONS
Thecriticsof“biggovernment”arerightinonesense.Whenitcomesto
efficiency,governmentservicesandoperationshavealongwaytogo.
Governmentsareorganizedintosilosthatdon’tshareinformation.Bureaucracy
toooftentrumpscommonsenseorsharedpractices.Citizensrarelyhaveone-
stopshoppingforgovernmentservices.Everycountryhascountlesstalesof
politiciansandbureaucratssquanderingtaxpayerdollars.
Blockchaincanimproveclientservice,increaseefficiency,andimprove
outcomeswhileenablingbothintegrityandtransparencyofgovernment.The
potentialtoimproveallfacetsofgovernmentissignificant,butsomeare
especiallyimportantinthedevelopingworld,wheregovernmentsare
establishingnewprocessesandcanleapfrogthesystemsoflong,stable,and
opengovernments.
Let’slookattwobroadareaswherewecanapplytheblockchain:integrated
governmentandthepublicsectoruseoftheInternetofThings.
IntegratedGovernment
Estoniaiscuttingadministrativeinefficienciesandprovidingintegratedservices
toitsresidentsandbusinessesbycreatinganelectronicIDcardforeveryoneand
usingablockchain-enabledInternetbackboneknownasthe“X-road”toconnect
acrossmultipleprogramsanddatabasesinbothpublicandprivatesectors.
Otherscandoit,too.
ManycountriessuchasCanada,theUnitedKingdom,andAustraliahave
explicitlyrejectedtheconceptofacentralpopulationregistryandsingle
governmentIDasamatterofpublicpolicy.Thisdecisionstemsfromaconcern
forpersonalprivacyandanaversiontoexpandingstatepower,especiallyin
grantingorrevokingidentities.
However,asEstoniashows,ifwehashofficialdocuments(passport,birth
certificate,marriagelicense,deathcertificate,driverslicense,healthcard,land
titles,voterID,businessregistration,statusoftaxpayments,employment
number,schooltranscripts,etc.)thatcurrentlyexistinmultipledatabasesintoa
singleblockchain,blockchain-enablednetworkscoulddeliverintegratedservices
withoutgoingthroughanycentralprocessing.Notonlycouldthismodelprotect
privacy,itcouldenhanceitbyallowingpeopletoverifytheaccuracyoftheir
information,andtoseewhoaccessedoraddedtothatinformation(i.e.,a
permanentinformationaudit).
Infact,inthefutureitmakessensethateachcitizenownsheridentity
informationratherthanagovernment.Asweexplainedinchapter1,justas
networksandmasscollaborationcaneliminatetheneedforagovernmentto
issuecurrencyorforabanktoestablishtrust,peoplewon’tnecessarilyeven
needagovernment-issuedidentitycard.SaidCarlosMoreiraofthe
cryptographicsecuritycompanyWISeKey,“Todayyouneedanorganization
withendowedrightstoprovideyouwithanidentity,likeabankcard,afrequent
fliercard,oracreditcard.Butthatidentityisnowyoursandthedatathatcomes
fromitsinteractionintheworldisownedbysomeoneelse.”
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Onthe
blockchain,theindividualownstheidentity.Your“personalavatar”coulddecide
whatinformationisprovidedtowhomunderyourcommand.Itcouldalsomake
choicesaboutintegratingdata.However,ratherthaneverythingyoudowith
governmentbeingintegratedinsomemassivegovernmentdatabase,the
integrationisachievedbythevirtualyou—ownedandcontrolledbyyou.
Betterintegrationwouldsupportlifeeventssuchasmarriage.MelanieSwan,
founderoftheInstituteforBlockchainStudies,explained:“Theblockchain—
withitsstructurethataccommodatessecureidentities,multiplecontracts,and
assetmanagement—makesitidealforsituationssuchasmarriagebecauseit
meansacouplecantietheirweddingcontracttoasharedsavingsaccount,andto
achildcarecontract,landdeed,andanyotherrelevantdocumentsforasecure
futuretogether.”
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Somehavesuggestedthattheblockchaincouldbecomea
publicdocumentsregistryoutsideanygovernmentsanctionorinvolvement.The
world’sfirstblockchain-recordedweddingtookplaceatWaltDisneyWorld,
Florida,inAugust2014.Smartprenuptialcontracts,anybody?
Beyondintegratedservices,governmentscouldregisterandmanage
documentswithtransparencyandreliability.Considerthestafftimespentin
issuing,verifying,updating,renewing,andreplacingpeople’sofficial
governmentrecords.Inadditiontoensuringdocumentveracity,blockchain-
enabledregistrationthroughpeer-to-peernetworkswouldsupportself-service,
wherepeopleverifyadocumentthroughthenetwork,notthrougharegistrar,as
wellaspersonalizedservice—whenyougenerateanofficialdocument,it
automaticallycontainsyourrelevantinformationandaccessrightstothat
information,andtrackswhoaccessesandusesitinthedocumentmetadata.
Forexample,theU.K.governmentisinvestigatingtheuseoftheblockchain
inmaintainingnumerousrecords,especiallyforensuringtheirintegrity.Paul
Downey,atechnicalarchitectwiththeU.K.GovernmentDigitalService,noted
thattheperfectregister“shouldbeabletoprovethedatahasn’tbeentampered
with”andshouldstoreahistoryofthechangesthathavebeenmade,plus“be
opentoindependentscrutiny.”
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Blockchain-basedsystemscaninfuseefficiencyandintegrityintodocument
registriesofallkindsandmanyothergovernmentprocesses.Let’scombine
supplychainmanagementwiththeInternetofThingstotaganewpieceof
equipmentwithasmartchipthatcommunicatesitsprovenance,ownership,
warranties,orspecialinformation.Governmentprocurementofficescouldtrack
itemsandautomateprocessesateverystep:purchasing,releasingpayment,
payingsalestaxes,renewingalease,ororderinganupgrade.That’ssimply
betterassetmanagement,reducingadministrativecoststotaxpayerswhile
increasingrevenuestogovernments.
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Particularlyinterestingarenationalandlocalopportunitiestoconnect
differentblockchainnetworksforgreaterefficiencyacrossjurisdictions.For
example,departmentsofmotorvehiclescouldconnectdrivers’databasesacross
stateorprovincialboundariestocreateavirtualdatabasethatfacilitates
confirmationofdriveridentity,status,andtrackrecord.OrintheU.S.health
caresystem,“Supposethepatient,insurancecompany,doctorandagovernment
payerallhadtheirfinancialrecordscometogetheronasingleledger,visibleto
all,foranygiventransaction.Thepotentialfortransparencywouldbematched
onlybytheopportunitiesfornewlevelsofefficiency,”saidSwan.
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TheInternetofPublicThings
WealreadywroteaboutpublictransportationontheInternetofThings.That’s
perhapstheeasierIoTopportunityforgovernment:recordsmartdevicesina
blockchainledgerforlifecycleassetmanagementofbuildings,workand
meetingspaces,vehiclefleets,computers,andotherequipment.Aswith
bAirbnb,governmentemployeescoulddynamicallymatchavailablesupplyand
demand,loweringsecurity,maintenance,andenergycoststhroughautomated
access,lighting,andtemperaturecontrols,andtrackinglocation,repairs,and
roadworthinessofgovernmentvehicles,aswellasthesafetyofbridges,rails,
andtunnels.
Publicleaderscouldalsoachievebetterpublicoutcomesininfrastructure
management,energy,wasteandwatermanagement,environmentalmonitoring
andemergencyservices,education,andthehealthsector.Inadditionto
improvingefficiencybenefits,theseblockchain-enabledapplicationscouldalso
improvepublicsafetyandhealth,easetrafficcongestion,andreduceenergy
consumptionandwaste(e.g.,throughleakypipes),tonamebutafewbenefits.
SecuringInfrastructure
Byintelligentlypartneringwiththeprivatesectorandotherstakeholders,the
governmentofEstoniahascreatedapublicsectorinfrastructurethatenables
muchgreaterconvenienceandaccesstogovernment,banks,publictransit,and
otherservicesforitscitizenry.Inadditiontoconvenience,Estoniaalsogains
competitiveadvantageintheglobaleconomy,attractingbusinessandinvestment
tothecountry.
Governmentsalreadyprovideservicestoneighboringjurisdictions(fireand
ambulance);outsourcetootherjurisdictions(dataprocessing);deliverservices
onbehalfofanotherjurisdiction(federalgovernmentprocessingincometaxes
onbehalfofboththenationalandprovincial/stategovernments);andsharing
services(sharingofficebuildings).
Estonia’se-Residentserviceisusefulforindividualsanywhereintheworld
whoneedanofficialIDtolaunchabusiness,particularlyonline.Estoniais
positioningitselftoprovideservicestoforeigncitizensthatothercountriesare
choosingnottoprovide.Whiletheservicesavailablenowarefairlylimited,
thereisnolimittoothergovernmentservicesultimatelybecomingdigitalfrom
endtoend.Forexample,publiclyfundedlibrariesthatarefreetolocalresidents
couldofferaccesstotheirdigitalcollectionstononresidentsandscholars
anywhereintheworldforasmallfee.Whatotherservicesmightlend
themselvestosimilartreatment,especiallydigitalserviceswheredata
managementandintegrityareimportant?
Offeringgovernmentservicesbeyondnationalbordersoftencomeswith
regulatoryhurdles.However,weliveinanincreasinglyglobalizedworldwhere
manyofourbiggestchallengesarenotexclusivetoonejurisdiction.Global
problemsrequirenewmodelsforproblemsolving,forworkingwithother
stakeholders.Policythattreatsbordersasporous,combinedwithblockchain
technologysuchastheInternetofThings,coulddomoretoaddressbig,
intractableissues.
EMPOWERINGPEOPLETOSERVESELVESANDOTHERS
Blockchain-enablednetworksmakegovernmentservicesmorerobustand
responsive.Self-service,inanythingfromrenewingapermittogettingan
officialdocument,willimprovehowgovernmentsoperate.Byfreeinguptime,
removingthepotentialforcorruptionorotherartificialbarriers,providingself-
trainingmodulesonline,andpayingcitizenstheirsocialsecurityfundsontime,
governmentsempowertheircitizens.
Newmodels,manytobedefined,canempowerpeopletocollaborateon
publicpolicygoals.Throughtheblockchain,wecanstrikeanewand
appropriatebalancebetweengovernment’sneedforcontrolandaccountability
foranentirebudget,andtheneedforindividualsandgroupstocontroland
contributetoportionsofthatbudget.Somejurisdictionshavebeenexploring
newmodelstogiveindividuals(recipientsofbenefitsfrommultiplegovernment
programs)orcommunities(neighborhoods),orevenentirepopulations
(citywide)controloftheirownpersonalbudgetspreviouslycontrolledbycivil
servants.
Forexample,ratherthanrequiringindividualstoapplytomanydifferent
governmentprogramsforvariousbenefits,eachwiththeitsowncriteria
(income,assets,numberandageofchildren,typeofhousing,levelofeducation,
etc.),thegovernmentplatformcouldpersonalizeabudgetbasedonidentity,
storedinformation,andproductionandconsumptionpatternsincludingrisk
factorssuchasresidenceinpoorzipcode,levelofeducation,andpurchaserates
ofcigarettes,alcohol,andprocessedfoods.Theindividualcouldthendecide
howtousetheresourcestoachievehisorherobjectivesaccordingtohisorher
circumstances.
Imaginethat—ratherthanpersuadingsomebureaucratthatyourchildneeds
anewwintercoat,youcandecideonyourown!Theresultisincreasedpersonal
accountabilityandempowerment.Wecoulddothesameatthecommunitylevel
(portionsofbudgetsrelatedtocommunity-specificservicessuchasparksand
communitycenters)oratacross-governmentlevel(establishingprioritiesand
thenspendingdiscretionarybudget).
Somejurisdictionsarealreadyempoweringtheleastadvantaged.
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The
blockchaincouldacceleratethistrend,allowingtaxpayerstoseewheretheir
dollarsareflowing,howfellowcitizensareusingtheseresources,andwhether
programsareachievingresults(incomechanges,educationalgoalsreached,
housingfound,etc.).Theplatformreducesoreveneliminatestheneedfortime-
consumingandcomplexmonitoringandreport-backs.Whilethevastscopeof
thedataandhowthey’retrackedthroughpeer-to-peernetworksmaysoundscary
andOrwellian,itisactuallyjusttheopposite.Ratherthanallthedataand
authorityrestinginthehandsofsomecentralauthorityoranonymous
bureaucrat,individualsandcommunitiescouldactbasedonverifiedand
trustworthyinformation.Atthesametime,theblockchainledgerassures
accountabilityfortheuseofpublicfunds.Wecannowachievetwopreviously
seeminglycontradictorygoals:“moregovernment”throughmoreinformation
andcontext;and“lessgovernment”throughprovidinginformationandbetter
toolsforindividualandgroupdecisionmakingandactionwithinthatcontext.
StreamingOpenandTrustedData
PerianneBoring,founderandpresidentoftheChamberofDigitalCommerce,
championstheideathatdistributedledgersopenupgovernmentforthebetter.To
her,“Blockchainenablesradicaltransparencybecauseitprovideseveryonewith
provablefacts.Anyonecanviewanytransactionthathaseverhappenedonthe
blockchain.”
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Governmentscaneasilyprovidedatathatotherscanuseforpublicorprivate
good.Thisdiffersfromso-calledFreedomofInformationlegislationwhere
citizensmustrequestaccesstoimportantgovernmentinformation.Ratherthis
involvesthereleaseofassets—actualdata.Governmentscouldreleasethousands
ofcategoriesofdatainrawformat,strippedofpersonalidentifiers:traffic
patterns,healthmonitoring,environmentalchanges,governmentproperty,
energyusage,governmentbudgetandexpenditures,expenseaccounts.Citizens,
companies,NGOs,academics,andotherscouldanalyzethesedata,puttheminto
applications,mapthem,andotherwiseusethemfor,say,understanding
consumerdemographictrends,researchingpatternsinhumanhealth,orknowing
whetherthebusisgoingtobeontime.
AsofAugust2015,theU.S.governmenthasalreadypublished165,000data
setsandtoolsonitsOpenGovernmentWebsite.
26
TheU.S.government’s
philosophythatgovernment-helddataispublicdatahasmadeitapioneerin
transparency.Othergovernmentsarefollowingsuit.AsofAugust2015,the
U.K.governmenthasreleased22,000datasets.
27
Releasingdatathroughpeer-to-peernetworksandtheblockchainwill
introduceevengreaterlevelsofefficiency,uniformity,utility,andtrust.Making
datapublicisanincentiveforensuringdataaccuracy.Peoplecanviewandflag
datawhentheyfindanerrororcanprovethatdatahavebeenalteredor
corrupted.
Ifyouregisteracompletedatasetinablockchainnetwork,thenthenetwork
canlogadditionsandchangestothedatasetandcanblockeffortstotamperwith
thedata.Noneedforacentraladministrator.Governmentscouldreleasemore
programmaticdatatohelpthepublicandanalystsunderstandtheseprograms
andtheirimpact.
PartneringtoCreatePublicValue
We’vealreadyseenhowsimplymakingmoretrustedinformationavailablecan
beusedforpositiveeconomicandsocialvalue,andhowindividualsand
communitiescanbeempoweredtoimprovetheirownlives.Blockchain-enabled
peer-to-peernetworkswillrequireustorethinkhowwedivideresponsibilityin
creatingpublicvalue.Whengovernmentspublishrawdata,theybecomea
platformonwhichcompanies,thecivilsociety,andothergovernmentagencies
andindividualscanself-organizetocreateservices.Wehaveused“payfor
success”modelsforafewyearsnowtoengagebusinessesinsolvingcivic
problems.Forexample,theU.S.DepartmentofLaborfundedinitiativesthathire
ex-offendersandreducerecidivism,andtheCityofChicagoraisededucation
levelsamongdisadvantagedpreschoolers.
28
Thismodelalsoencouragesinnovationandincentivizesachievementof
desiredresultsbyreleasingfundsonlywhentheseresultshavebeenachieved
andaremeasurable.Thinkaboutthepowerofongoingmicropaymentstoasmall
not-for-profitgroupworkinginacommunityonsustainableenergyinitiatives.A
governmentprogramcouldlinkfundingtoactualdeclinesinconsumption.The
not-for-profitgroupcouldsupportitselfwithouthavingtorelyoncomplex
paperworkforreimbursementandmightevensecurefinancingbasedonthe
government’scommitmenttoitsparticipationinthe“payforsuccess”model.
PeggingSmartSocialContractstoPoliticalReputations
Justasthebitcoinnetworkusesblockchaintechnologytoconstantlyensurethe
integrityofpayments,governmentnetworkscanuseblockchainstoensurethe
integrityoftheirtransactions,records,andimportantdecisions.Officialscan’t
hide“offthebook”paymentsorothergovernmentrecords,includinge-mail
records,decisionlogs,anddatabases.Whereassecurityoftenderivesfrom
fences,walls,oraperimeterofprotection,theblockchainprotectsagainst
tamperingfrombothinsideandoutside.Therefore,itkeeps“honestpeople
honest.”
29
Transparencyiscrucialforchangingthebehaviorofaninstitution.Whilewe
ofcoursecannotforcethesevaluesandbehaviorsonourpublicrepresentatives,
wecanlimittheirdecisionsandactionsthroughsmartcontractsthatdefinetheir
rolesandresponsibilitiesasourrepresentativesandthenmonitorandmeasure
themontheblockchain.
Remember,smartcontractsareself-executingagreementsstoredonthe
blockchain,whichnobodycontrolsandthereforeeveryonecantrust.Political
factionssuchastheGrandOldPartycouldusethemsothatcandidateslike
DonaldTrumpwhousetheirpartyinfrastructuretodebateandcampaignduring
primariescouldn’trunasindependentsinageneralelection.Wecouldapply
smartcontractstodifferentgovernmentoperations(supplychain,externallegal
services,pay-for-successcontracts)andevenmorecomplexrolesofgovernment
andourelectedrepresentatives.Wedoforeseepeer-to-peernetworkstrackingan
electedofficial’scommitmentsandhisorherfulfillmentofthesecommitments.
Watchdogsalreadydothisthroughformalandinformalpeernetworksonthe
Web.
Whilethisapproachcouldnotapplytoeverythingweexpectfromour
politicalleaders,wecoulduseitforallmannerofspecificcommitmentsand
actions.Whilemeasurementofeventualoutcomeswillbemoreofachallenge
(e.g.,resultsachievedwithmoneyspent),overtimewewillbuildexperienceand
expertisewithindicatorssothatwebaseourassessmentsonfactsratherthan
currentspin.Thisisnotpieinthesky—inLondon,acandidateinthe2016
mayoraltycampaigniscallingalreadyfortheuseoftheblockchaintohold
electedofficialsaccountableforpublicbusiness.
30
Regulatorscouldimplementblockchainprocessesasaverifiablemeansto
trackthecommitmentsofregulatedindustriesinrealtime,assessingwhether
theyarefollowingthroughonpromisesmade(e.g.,investmentsinsustainable
energy)orcomplyingwithregulatedpractices(e.g.,on-timedelivery,safety
targets).Whilepublicationofkeyperformanceindicatorsandresultsonpublic
Websitesisincreasinglycommon,theblockchainwouldenabletheseprocesses
tobeautomatedandguaranteedaccuratewhenappliedtomeasurableresults.
Thedatageneratedbytheseprocessesensurethatthepublicisconstantly
awareofwhoisbehavingwithintegrity.Howoftendidheshowupatmeetings?
Howdidhevote?Didheabidebyhiscommitmentstodosuch-and-such?Who
donatedtoherpoliticalcampaign?Whoviolatedthetermsofhersmartcontract?
Electedofficialsandthoseregulatedmusthonortheircommitmentsorexplain
whytheyhaven’t.Italsoprovidesfeedbacktotheelectorateonwhethertheir
demandsasconstituentsarereasonableandfair,notreactionary.Votersoften
wantmoreservicesbutlowertaxes,ormorefactoriesbutnotintheirbackyard,
orlowerpricesbuthigherwages.Assuch,opendataprovidesameansof
understandingtrade-offsandincreasingtheaccountabilityofallparticipants.
THESECONDERAOFDEMOCRACY
Whilerepresentativedemocracyiscomplexandvariesglobally,onething
remainsconstant:passivecitizenry.Todatethediscussionhasfocusedonhow
blockchaintechnologycanhelpcreatetheconditionsforfair,secure,and
convenientvotingtooccur.Tobesure,wehavebigopportunities.Onlinevoting
basedontheblockchainwouldenablecitizenstogivetheirviewsmoreoften.
Butattemptingtoreplacerepresentativedemocracywouldbeamistake.
“Motionsputtoavoteareusuallywellrefineddistillationsoflargeandcomplex
issues.Theyresultfromalongprocessinvolvingconflicts,contradictionsand
compromises.Tounderstandamotionandtovoteresponsibly,citizensneedto
participateinsomeformofrefiningprocess,”DonwroteinTheDigital
Economymorethantwentyyearsago.
31
However,ifweunderstandthecontours
ofanewmodel,wecanseehowblockchaintechnologycanhelpfarbeyond
voting.
TechnologyandDemocracy:NotaHappyStory
Howhastechnologyaffecteddemocracy?Surprisingly,thestoryismixedat
best.Televisionarguablydegradeddemocraticdiscussion,turningwhatAlGore
called“themarketplaceofideas”
32
intoaone-waydialogue.Addequallytoxic
cablenews—wheretalkingheadswinratingsbyattackingopponentsratherthan
discussingideas—andyou’vegotstupefyingbattlesofextremes.Asthe
fictitiousnewsanchorHowardBealeinthefilmNetworksaid,“I’masmadas
hellandI’mnotgoingtotakethisanymore!”
SofartheInternethasn’tchangeddemocracyforthebetter.Ifanything,with
increasedsurveillanceandinfringementofprivacyonthepretextofnational
security,democraticgovernmentsarebehavingmorelikeauthoritarianregimes.
We’dliketofocusonthreeparticularchallenges.
1.FragmentingPublicDiscourse
AlGorehopedthedigitalagewouldreversethetideofnegativityerodingour
basicinstitutions.“Thegreatestsourceofhopeforreestablishingavigorousand
accessiblemarketplaceforideasistheInternet.”
33
Hewasnotalone.Wehave
longarguedthatastheWebextendsinusage,resources,andconnectivity,
increasedaccesstofactualinformationwouldimprovethequalityofpublic
discourse.
However,theoppositeseemstobeoccurring:balkanizationofperspectives
andexploitationofthenewtoolsbyideologueswhoorganizeintobattalions.
Todayascontentproductionbecomesmoredistributedandthesourcesof
informationandopinionproliferate,anyonecanpresentacertainviewand
attractalike-mindedaudience,whichmaybesmallbutmayalsobezealous.
Thenewcommunicationsanddataanalysistoolshavealsoallowed
ideologicallydrivengroupstohijacksocialandpoliticaldebates.Bothliberals
andconservativesareusingthemtocreateechochambersthatunderminethe
potentialforcompromise,letaloneconsensus.
2.ScalingIgnoranceontheWorldWideWeb
Justaspeoplecan’ttellapersonfromadogontheInternet,theycan’talways
discernthetruth.Conspiracytheoristspopularizetheirantievidenceviewsin
daysorevenhours,
34
mostrecentlythosearoundthecrashofMalaysiaAirlines
FlightMH370.ConsiderthatthreeintenAmericansnowbelievethathuman
beingshaveexistedsincethebeginningoftime.
35
Anddespiteoverwhelming
scientificevidencethatcarbonemissionsthreatenlifeonEarth,thosewithshort-
termvestedinterestshaveeffectivelydenigratedthescienceandblocked
intelligentdiscussion,letaloneactionplans.ThoseusingtheWebtofurther
ignoranceanddenialismareoutgunningscientistsandrationalists.
InternationallyrepressivecountriesfromIrantoNorthKoreaarecreating
private,restrictedversionsoftheInternetfortheircitizens,makingtheWeban
evermorepowerfultooltotrumprationalismwithideology.
3.ComplicatingPolicyandImplementation
Inthepredigitalera,enactingandenforcingpolicywaslesscomplicated.Policy
specialistsandpresidentialadvisershadstrongcommandoftheissues.Today
theycanbarelykeeppacewithdefiningtheproblems,letalonecraftingthe
solutionsorexplainingthemtothepublic.SobadistheproblemthatPresident
ObamasignedintolawthePlainWritingActof2010requiringfederalagencies
touselanguagethepubliccanunderstand.
36
Today,manyunforeseenissuesarisebetweenelections.Nogovernmentcan
crediblyassertthatithasavotermandatetotakespecificactionsonallpertinent
issues.Moreover,governmentslacksufficientin-housepolicyexpertiseonmany
issues.Soevenifagovernmentcommissionsanopinionpolltodiscernthe
public’sview,thepollingprocessdoesn’ttapintothewisdomandinsightthata
nation’scitizenscancollectivelyoffer.
PuttingDemocracyontheBlockchain
Alloftheseproblemssuggestanewmodelofdemocracythatemphasizespublic
discourseandcitizenengagement.Let’snotconfusecivicengagementwith
notionsofso-calleddirectdemocracywhereweallwatchtheeveningnewsand
voteonpublichangingsviaourmobiledevicesorinteractivetelevisions.
Citizensdon’thavethetime,interest,orexpertisetobecomeinformedonall
issues.Wewantreasonedopinion,notjustanyopinion.Westillneedlegislative
assembliestodebate,refine,andresolveissues.
Butsurelyamorecollaborativemodelofdemocracy—perhapsonethat
rewardsparticipationsuchastheminingfunction—couldencouragecitizens’
engagementandlearningaboutissues,whileatthesametimeinvigoratingthe
publicsectorwiththekeenreasoningthenationcancollectivelyoffer.Couldwe
createaculturewherepeopleareturnedonbythedemocraticprocess,notturned
offbytheirrepresentatives’abuseoftheirseats?
Whyhasthisnotoccurredtodate?Themainproblemisnotatechnological
one.Mostpoliticians,regardlessofpoliticalstripe,seemtocaremoreabout
winningelectionsthanaboutsolvingthecrisisoflegitimacythroughcitizen
engagement.
Let’sstartwiththebasics.Themostfundamentalprocessforrepresentative
democracyistheelection.Votingistheright(andinsomecountries,like
Belgium,theresponsibility)ofalleligiblecitizensinademocracy.Yetaround
theworldelectionsaredeeplyflawed.Corruptofficialstamperwithresultsor
outrightrigthem.Votingcanbesuppressedusingeverythingfromlackofaccess
tobriberyandintimidation.Manipulatingelectionsisacomplexbusinessbutit’s
donealmosteverywhere.Couldblockchaintechnologieshelpimprovethevoting
process?
Forallourtechnologicaladvances,themechanicsofvotinginelectionshave
remainedlargelyunchangedforhundredsofyears.Inmanypartsoftheworld,to
castyourvoteyougotoapollingstation,identifyyourself,markapaperballot,
putitinasecuredbox,andwaitforhumanbeingstocounttheballots.
Electronicvoting(e-voting)isatermforvotingwiththeaidofany
electronicsystem.E-votinghas,inmanycases,provedasunreliableasmanually
talliedvotes.E-votingtodaysuffersfromthreeproblems:attacksonthesoftware
andhardware,mistakesorbugsinthecoding,andhumanerror.In2004,avoting
machineaidinginthegeneralelectioninNorthCarolinawasaccidentallysetto
storeonly3,000votes.Itirrevocablylost4,438votesinaracethatwasdecied
byadifferenceofonly2,287.
37
BLOCKCHAINVOTING
Howmightvotingontheblockchainwork?Imaginetheboardofelections
creatingdigital“wallets”foreachcandidateorchoice,withapprovedvoters
allocatedonetokenorcoineachforeachopenseat.Citizensvoteanonymously
throughtheirpersonalavatarbysendingtheir“coin”tothewalletoftheirchosen
candidate.Theblockchainrecordsandconfirmsthetransaction.Whoeverends
upwiththemostcoinswins.
Somehavetriedtosolvetheproblemoftrustbyusingend-to-endauditable
votingsystems.Votesaretypicallymadeviakiosk,whichproducesa
cryptographicallyauthenticatedpaperrecordoftheballotbutallowsvotestobe
countedelectronically.
CommitCoinusescryptographicproof-of-worksystemstoproveamessage
wassentatacertaindate.Theinventors,JeremyClarkandAleksEssex,saywe
canuseittoprovetheintegrityofelectiondatabeforetheevent,asameansof
“carbondatingcommitments,”providingabaselinetocounteractfraudand
error.
38
End-to-EndE-VotingSystems
Citizensaremakingadvancesallthetime.In2015,academicsfromtheNational
andKapodistrianUniversityofAthenspublishedapaperintroducingDEMOS,a
newend-to-end(E2E)e-votingsystemverifiableinthestandardmodel,without
relianceonsetupassumptionsoraccesstoa“randomnessbeacon.”
39
Itusesa
distributedpublicledgerliketheblockchaintocreateadigitalballotboxthat
citizenscanusetovotefromanywhereintheworld.
AnE2Everifiableelectiondetectselectionauthoritieswhotryto
misrepresentoutcomes.Voterscastballotsinexchangeforreceiptsthatallow
themtoverifythat(a)theirvotewascastasintended;(b)itwasrecordedasit
wascast;and(c)itwascountedasitwasrecorded.Anexternalthirdpartycould
verifytheelectionresults.Votersstillmustacceptsetupassumptionsandtakea
leapoffaithontheelectionresults.
WithDEMOS,thevotingsystemgeneratesaseriesofrandomized
numbers.
40
Votersgettwosetsofnumbers,orkeys:onecorrespondingtothem,
andonetotheirpreferredcandidate.Aftertheencryptedvoteiscast,it’ssent
acrossmultipleservers.Resultsarepublishedtoabulletinboardpublicly
displayingalltheinformationrelatedtotheelection.
NeutralVotingBlocs
InAustralia,anorganizationcalledtheNeutralVotingBloc(NVB)isusing
votingontheblockchaintorevolutionizedemocracyinanotherwayentirely.
Theyhaveauniqueapproachtogovernment,andit’soptimistic:“Webelievethe
bestwaytofixpoliticsistoparticipateourselves.”
41
FounderMaxKayedescribesNVBasa“politicalapp”whereinterested
citizenscanregistertheiropinionsonpolicyissuesby“voting”onthe
blockchain.Oncethetimeisup,thefinaltallyinstructselectedofficialsonhow
tovoteingovernmentalproceedings.Whenasked,whyareyouusingthe
blockchain?MaxKayereplied,“Becauseweintendtofacilitateavarietyof
parties,someofthemwillnecessarilydisagreestrongly.Tomaintainintegritywe
needeachpartytobeabletoindependentlyverifythevotingrecord,andeach
vote.”Furthermore,Kayesuggeststhereareanticensorshipproperties,and
immutability.Hesaid,“TheonlyelectronicstructureontheplanetI’mawareof
thatcandothisisthebitcoinnetwork.(Althoughthereareotherblockchains,
theyarenotimmutableenoughbecausetheirhash-ratesaresolow).”
42
ProtectingtheVoters
Voterintimidationcantakeaviolentturn.InZimbabwe,thepartyopposing
RobertMugabewithdrewfromtheelectionwhencoercionfromsupporting
militiashadbecometoolethal.Theelectionswerecarriedoutanyway—Mugabe
won.Whiletechnologicaladvancesalwayscomewithpeoplewhoexploitthem
totheirownadvantage,somearebeginningtosaythatblockchaintechnology
coulderadicatecorruptioninplacessuchasAsia.
InJuly2014,duringoneofthemostcontestedpresidentialelectionsin
Indonesianhistory,ananonymousgroupofsevenhundredhackerscreatedan
organizationcalledKawalPemilu,or“ProtecttheVote.”Itsmissionwasto
publiclytallyelectionballotsonlinetoletvotersverifyresultsateachpolling
station.Theprinciplesofdecentralization,transparency,andindividual
anonymitycombinedtowardoffmaliciouscyberattacksandensureafairer
election.
43
“Docorruptgovernmentswanttokeepthemselveshonest?”
44
askedAnson
Zeall,CEOofCoinPip,acompanyspecializinginsendingfiatcurrenciesacross
internationalboundariesusingtheblockchain.Hequestionswhethereveryone
embracesadvancesinvoting,andwhetherpoliticiansactuallywantfair
elections.Toothers,e-votingseemslikeanunnecessaryorhastyleapforward.
Wearguethatmanyoftheseissuesbelongtotherealmofimplementation,not
design.
Theredesignofourelectoralandpoliticalsystemswilllikelyinfluencemore
fundamentalissueswithvotingindemocraticelections.ComparevoterIDfraud
withothermoreinsidiousfactors.AcomprehensiveinvestigationofvoterID
fraudintheUnitedStatesin2014foundthirty-oneincidents,including
prosecutionsandcredibleallegations,infederal,state,andmunicipalelections—
since2000.
45
Inthattime,morethanonebillionballotswerecastingeneraland
primaryelectionsalone.
InthefourstateswiththeharshestIDlaws,morethanthreethousandvotes
werepositivelyrejectedforlackofproperID.
46
Thisdoesn’tincludethosewho
didn’tbothertotryatall—andthatisamuchbiggerproblem.Whiletheirmodel
ofdemocracyisheraldedaroundtheworld,mostAmericansdon’tvotein
elections,citingreasonslike“nothingevergetsdone,”“politicsissocorrupt,”
and“thereisnodifferencebetweenthechoices.”
47
Weexpectblockchain
technologytohavesomeinnovativeapproachestotheseproblems,too.
Withtimeanddevelopment,blockchaintechnologymightbetheimpetus
thatallowse-votingtotransformdemocraticelectionsandinstitutionsby
effectivelyandreliablybringingthemintovoters’hands.
ALTERNATIVEMODELSOFPOLITICSANDJUSTICE
Iftheblockchaincouldenableamoreefficient,responsivegovernmentand
improvehowdemocracyisadministeredthroughnewvotingprocedures,could
italsocatalyzenewpoliticalprocessesaswell?
Forsomesupportersofnext-generationgovernment,theultimateaimof
electoralreformistoenableasystemof“liquiddemocracy.”EduardoRobles
Elvira,CTOofAgoraVoting,isonesuchfan.Hedescribesliquiddemocracyas
combiningthebestpartsofdirectdemocracy(likethesortpracticedinancient
Athens)withtoday’srepresentativedemocracies,whichaskverylittleoftheir
electorates.
Liquiddemocracy,alsocalleddelegativedemocracy,allowscitizensthe
ultimateincustomizationandpersonalizationofthedemocraticexperience.In
RoblesElvira’swords,inaliquiddemocracy“youcanchooseyourlevelof
participationatanypointintime.”
48
Yourinputisalwayswelcome,butnot
requiredtokeepthecountryrunning.
Voterscandelegatevotingauthoritytomultiplerepresentativesdelineated
acrossanarrayoftopics.
49
Referendaarethenheldfrequentlyandcategorized
bytopic,indicatingwhichproxy(ifany)shouldbepromptedtocasttheirvote
ontheissue.Thisenablesasysteminwhichvoterscanselectmanytrusted
expertsoradviserstovoteontheirbehalf.Underlyingthisideologyisthebelief
thatnooneperson(orparty)hasthefull,rightanswertoeveryquestion.In
representativedemocraciesthisaxiomisoftenbothassumedandignored.
RoblesElviraisworkingwithgovernmentstobuild“ahighlydistributed,
uniquelogofeventsreallygoodatsolvingdistributeddenial-of-service(DDOS)
attacks.”Blockchaintechnologyenablesthis.Hesaid,“Itisverydifficultto
createasecure,distributedsystemandtheblockchainallowsustodothis...
andit’snotjustthatit’sdistributed,butthatit’sdistributedinasecureway.This
isreallyimportantandcanbeusefulforalotofapplications;e-votingisjustone
ofthem.”Hiscompany,AgoraVoting,providesthetechnologicalinfrastructure
neededtoconductauditable,transparent,andverifiablee-elections.“Withtop-
notchcryptographictechnology,humansbecometheweakestlinkinthesecurity
chain.”
50
Spain’santiausteritypartyPodemos(translatedto“WeCan”)usesAgora
Votingtoholditsprimaryelections.Withtheparty’scommitmentto
participatorydemocracycameacommitmenttotransparency,anideological
shiftinSpainandelsewhereconsistentwiththeoneunderpinningdistributed
technologies.
RoblesElviraseessomelimitations,too.Tomaximizesecurityand
anonymity,ausercurrentlyneedsaccesstothewholeblockchain,abehemothof
afile.Sizemakesitdifficulttoaccess(especiallyonamobile)anddecidedly
user-unfriendly.Still,thetechnologyisalwaysevolvinganddesignsareever
improving.“Weareatthebeginningofe-voting,”saidRoblesElvira.
51
The
technologyispliable.Undoubtedly,itsbestapplicationsareyettocome.
DisputeResolution
Somelegaldisputesarebestleftoutofthecourts.We’veseenhowsmart
contractscanenabledecentralized,independent,autonomousadjudicationof
commercialdisputes.Smartcontractsareindifferenttonotionsoffairnessor
justice,however,andunabletoreconcileconflictingversionsoffacts.Even
morerevolutionaryforadjudicationthanaverifiablerecordofevidence,the
blockchaincanbetheplatformforP2Pdisputeresolution.Inthismodel,ajury
ofhundredsorthousandsofyourpeerscouldweighintoeffectively,asPamela
MorganofEmpoweredLawsaid,“crowdsourcejustice.”
52
Random-SampleElections
Anotherdemocraticmodelenabledbyblockchain-stylegovernanceisrandom-
sampleelections.Votersselectedatrandomwouldreceiveaballotinthemail
anddirectionstoWebsiteswithcandidateinformationandstatementsfrom
interestedparties.Anyonemayrequestaballot,butitwillnotbecounted,and
willappearindistinguishabletoitsvalidcounterpartstoallbuttherequesting
voter.Thesecanbesoldtoavotebuyer,buttheywouldneverknowifthatvote
counted.Asthesevotesarebelievedmorelikelytobesoldthantheircountable
counterparts,itmakescoercionimpracticallycostly.DavidChaum,inventorof
theconcept,saidrandom-samplepollingcouldproducemorerepresentativeand
reliableresultsthanelectionstodayregularlyachieve.
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PredictionMarkets
ThecompanyAugurisusingtheblockchaintoaggregatemanysmallwagers
aboutfutureeventsintopowerfulpredictivemodels.Withtherightapplication,
itcouldhelpcreatecollaborativedemocracy.Governmentscoulduseprediction
marketstoengagecitizensinhelpingbetterunderstandfuturescenarios,
enablinggovernmentstomakebetterpolicychoices.
Ethereum’sVitalikButerindiscussesanalternativemodelofpoliticallife
calledfutarchy.
54
ConceivedbyeconomistRobinHanson,itstenetscanbe
neatlysummarizedas“voteforvalues,butbetonbeliefs.”Citizenselecttheir
democraticrepresentativesinatwo-stageprocess:First,picksomemetricto
determinetheircountry’ssuccess(likeliteracyorunemploymentrate).Then,use
predictionmarketstoselectgovernmentpoliciesdesignedtooptimizethe
electedmetric.
Augursstyleofpredictionmakingcouldengagecitizensinmakingsmall
choicesthatcontributetonationaldiscussionsofpolicy,eventuallyshapingthe
futureoftheirowndemocracy.
BlockchainJudiciary
Theblockchaincanalsotransformourjudiciary.Combiningtheconceptsof
transparency,crowdsourcing,andonlinecitizenparticipation—overablockchain
—wecanenvisionreintroducingconceptsofancientAtheniandemocracyinto
thetwenty-firstcentury.
55
CrowdJury
56
lookstotransformthejusticesystemby
puttingseveraljudicialprocessesonline,usingbothcrowdsourcingandthe
blockchain,includingfilingachargeorcomplaint,gatheringandvettingof
evidence,engagingcitizensinopentrialsonlineandasonlinejurors,andissuing
averdict.Thinktransparentprocesseswithcrowdsourceddiscovery,
crowdsourcedanalysis,andcrowdsourceddecisionmakingandpresto—youget
anaccurateoutcomeinamuchshortertimeframeandatvastlyreducedcost.
Theprocess
57
startswiththereportingonlineofasuspectedcivilorcriminal
wrongdoing(e.g.,apublicofficialsuspectedofreceivingbribes)andinviting
potentialwitnessestoprovideevidence,andcombininginformationfrom
multiplesources.Theoriginalcomplaintorclaim,aswellasalltheevidence,
wouldbecryptographicallystoredviatheblockchaintoensurethatitremainson
recordandisnottamperedwith.
Onceitisfiled,relativelysmall(ninetotwelvepeople)groupsofvolunteers
self-selectedbasedonrequiredexpertisewouldanalyzethefactsanddetermine
whetherthereisvaliditytogototrial.Attrial,therewouldbetwopossible
paths.First,thenamed“wrongdoer”pleadsguiltyandproposesrestoration
(whichmayormaynotbeacceptedbyajury)orthecomplaintproceedsto
onlinetrialwithamassivejury.JustasinAthens,whereanycitizenoverthirty
couldapplyforjuryforanygivenperiod(butnotforaspecificcase),individuals
willapplyforjurieswithfinalselectionbyarandomizationdevice,justas
AthenianjurorswereselectedbyakleroterioninthefourthcenturyBC.
58
Asa
result,thereisnobiasinthedistributionofjurorstospecificcases.Thetrialand
alltheevidencearebroadcastonlineinanopen-court-likemodel.Anyonecan
“attend”andaskquestionsofthedefendant,butonlyjurorsvotefortheverdict
viaanonlinevote.
Let’sstartwithconflictadjudicationinlow-valuedisputesandresolving
issuesinglobalcommunitiesacrossjurisdictionallines,forexamplesocial
networks.TheU.K.CivilJusticeCouncilrecentlylookedatonlinemodels
worldwidetorecommendonlinedisputeresolution.
59
Mostoftheearlymodels
dependuponuseofjudgesorotherexpertadjudicatorsatsomestagesinthe
onlineprocess.Otherprocessesinplacerelyuponotheronlineparticipantsto
calloutandaddressinappropriatebehavioronlinesuchasdefamatoryfeedback
(e.g.,eBay’ssubsidiaryintheNetherlandsMarktplaats’IndependentFeedback
Review)orcheatingatonlinegames(e.g.,likeValve’sOverwatch,whichallows
qualifiedmembersofthecommunitytoreviewreportsofdisruptivebehavior
andapplytemporarybans,ifappropriate.)
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Thisisafarcryfrommobjustice.It’sthe“wisdomofthecrowd”appliedto
manymorejudicialprocesseswithbeneficialresults.
ENGAGINGCITIZENSTOSOLVEBIGPROBLEMS
Mostpeoplewhobelieveinscienceunderstandthathumancarbonemissionsare
warmingtheatmosphere.Thisclimatechangeisdangeroustooursandmany
otherlife-formsontheplanet.Governments,companies,andNGOsworkingon
reducingcarbontendtoagreethatso-calledcarbontradingisanenvironmentally
effectiveandeconomicallysensibleapproachtoloweringemissions.
Onepolicyiscalled“capandtrade.”Aregulatorybodysetsa“cap”orlimit
oncarbonemissionsandlowersitovertimetoreducetheamountofpollutants
releasedintotheatmosphere.The“trade”representsamarketforcarbon
allowances,helpingcompaniesandotherorganizationstocomplywiththeir
allocatedlimit.AccordingtotheEnvironmentalDefenseFund,“Thelessthey
emit,thelesstheypay,soitisintheireconomicincentivetopolluteless.”
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TodaytheEuropeanUnion’smostdevelopednationshavecap-and-trade
exchanges.California,Ontario,andQuebecagreedontheMontrealProtocol,
advocatingforaglobalexchange.Officialsatnation,state,city,andenterprise
levelscouldallocatecap-and-tradecreditstobalancesetallowances.Atthesame
time,blockchain-basedreputationsystemscouldratethekilowatt-hoursof
energyproviderstothegridaccordingtostandardsofsustainablegreenhousegas
reduction.Forexample,thesystemcouldtagenergysourcedfromcoalwith
highercapdebitsandrenewableslikesolarascredits.Blockchaincanhelp
automatethecap-and-tradesystemonanindustrialscale.Efficientpricing
algorithmscomputecreditsanddebitsinrealtime,andgreenorganizations
captureandtracktheircarboncreditsontheledgerandrollthemintoan
exchange.
Whatifwecreatedacap-and-tradesystemforpeople?Surelyweneedmore
thanourinstitutionstochangetheirbehavior!Personalcarbontradingwould
workthroughtheInternetofThings.Sensors,detectors,andinstrumentation
wouldmeasureyourwaterheater,dishwasher,andhouseholdthermostatinreal
timeandinformyouofyourcarboncreditsbalance.Atthesametime,youcould
earncreditsbyactinginpractical,sustainableways.Ifyouaddedanarrayof
solarpanelstoyourroof,youwouldearncreditsbyreturningexcessenergyto
thegrid.
Couldthiscreatenewsourcesofannualincomeforpeople?Afterall,the
poorandhomelessarelowcarbonusers.Bybikingtowork,youcouldsave
creditsthatyourhotwaterheatercouldspend:“Hey,dishwasher—mypersonal
cap-and-tradewatchindicateswecanaffordtorunonfullwashandthirty-
minutedrycycle.”Watersensorsinthewashercouldmanagewaterusagebased
onanacceptablelevelofparticulatedensity,dampnesssensorsinthedryercould
turnthedryeroffwhentheclotheshavereachedanacceptablelevelofdryness,
andthebuilding’sHVACsystemcouldharnesstheexcessheat.
WIELDINGTOOLSOFTWENTY-FIRST-CENTURYDEMOCRACY
Asaglobal,distributed,andprogrammableledgerthatissecure,designedfor
privacy,andenrichedwithincentivesystems,blockchaintechnologylendsitself
tothedevelopmentofnewdemocratictoolssuchas:
DigitalBrainstorming:Bringingtogetherpolicyofficialsandcitizensto
havereal-time,moderated,onlinebrainstormingsessionstoidentifynewpolicy
issuesorneeds.Consensusisthenachievedthroughone-token,one-votesystems
thatcanhelpachievethoughtfuldiscussionandmakeitharderfordisrupters,
trolls,andsaboteurstocausedamage.
Challenges:Onlinecontestswithapanelofjudges.Thinkofpreblockchain
modelsliketheGoldcorpChallenge(mentionedearlier),theXPrize,orthe
numerousinnovationchallengesconductedbymanyWesterngovernments.The
goalofchallengesistoengagecitizensininnovationandthecreationofpublic
value.
OnlineCitizenJuriesandPanels:Citizenschosenatrandomserveas
policyjurorsoradvisersonatopic.ThejuryusestheInternettoshare
information,askquestions,discussissues,andhearevidence.Blockchain
reputationsystemshelpquestionerstoknowthebackgroundandreputationof
thejuryandpanelmembers.Decisionsandrecordsarerecordedonthe
blockchain.
DeliberativePolling:Thisgivescitizenstheresourcestolearnaboutand
reflectupontheissuesinacollaborativeanddeliberativefashion.Thiswould
combinesmallgroupdiscussionsontheInternetwithscientific,random
samplingtocontributemoreinformedpublicinputinpolicymakingthaninstant
pollingcanprovide.
ScenarioPlanning:Buildingscenarioswithsimulationandmodeling
softwaretoprojectfuturepolicyneedsandtounderstandthelong-term
consequencesofdecisions.Politicians,bureaucrats,andcitizenscouldassessthe
potentialimpactsonarangeoffactors,rangingfromhealth,totheenvironment,
totheeconomy.
PredictionMarkets:AsweexplainedinthecaseofAugur,thereare
countlessopportunitiestousepredictionmarketsfortradingtheoutcomeof
events.Governmentscanusethemtogaininsightintomanysubstantive
questions:Whenwillthebridgeactuallybebuilt?Whatwillbethe
unemploymentlevelintwelvemonths?WilltherebeaNationalPartyprime
ministerafterthenextelection—anactualquestionfromaniPredictmarketin
NewZealand.
Blockchaintechnologiescouldsuperchargeallofthesetools.Tobegin,
contributionsfromcitizenscouldbeprivate,openingupthepossibilitiesof
engagement.Thisisbadforrepressivegovernmentsbutgoodfordemocracyas
itmakesitmoredifficultforgovernmentauthoritiestocensor,suppress,and
trackdownopposition.Atthesametime,asdescribedearlierinthecaseof
Blockapedia,blockchain-basedreputationsystemscouldenhancethequalityof
discussions,reducethenumberoftrollsandsaboteurs,andensurethatall
commentsareaccuratelyandindeliblyrecorded.Whenthereiscompensationfor
winnersorothercontributors,settlementscouldbemuchmoregranularand
instantthroughdigitalcurrencies.Varioussmartcontractscouldbeconstructed
withcitizensandgroupstobetterclarifytheroleofeveryoneintheprocess.
MelanieSwan,founderoftheInstituteforBlockchainStudies,arguesthat
blockchaintechnologymighthaveamaturingimpactonhowsocietyapproaches
topicslikegovernance,independence,andcivicduty.“Itmightseemharderto
letgoofcentralizedauthorityinmattersofgovernmentandeconomicsas
opposedtocultureandinformation,butthereisnoreasonthatsocialmaturity
couldnotdevelopsimilarlyinthiscontext.”
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Clearly,thenext-generationInternetprovidesprofoundnewopportunities.
Themainchallengesarenottechnological.Onecautionaryexample:Obama’s
2008campaigncreatedanexpansiveInternetplatform,MyBarackObama.com,
thatgavesupporterstoolstoorganizethemselves,createcommunities,raise
money,andinducepeoplenotonlytovotebuttogetinvolvedintheObama
campaign.Whatemergedwasanunprecedentedforce:thirteenmillion
supportersconnectedtooneanotherovertheInternet,andself-organizedto
buildthirty-fivethousandcommunitiesofpeoplewithcommoninterests.When
youngpeoplechanted“YesWeCan,”itwasn’tjustasloganofhope;itwasan
affirmationofcollectivepower.
However,in2012theObamacampaignshiftedfromcitizenengagementto
“bigdata,”replacing“YesWeCan”with“WeKnowYou.”Ituseddatatoswing
votersandtargetsupportersforfunds.Thecampaignwontheelection,but
relegatedcitizenstoconsumptionofitsmessages.Thebigdatastrategyhad
fewerrisksthanastrategyofself-organizingcommunities.
Duringbothhistermsthepresidentdidtakeimportantstepstoengage
citizens,primarilythrough“Challenges,”whichareelaboratecontestsfor
innovativeideas.Butinhiscriticalsecondcampaign,Obamafailedtoengage
citizensandmissedahistoricopportunitytostrengthengovernmentlegitimacy.
Intheend,evenPresidentObama,whohadbeencalled“TheFirstInternet
President,”tooktheexpedientroutetopower,usingsocialmediatobroadcast
messagesandraisefundsthroughdata-enrichedtargetedadvertisingonline.
IfnottheInternetPresident,thenwho?
Thereisaroleforeveryoneinmovinggovernmentanddemocracyonto
blockchains.First,thereareunlimitedopportunitiesforeliminatingredundancy
andwastedtime,votingandparticipatinginnewdemocraticprocesses,serving
asajuror,earningenergycredits,payingtaxesandreceivingpublicservices,and
seeingwhereone’staxdollarsaregoingandhowrepresentativesarevoting.
Electedrepresentativesneedtostepupandshowleadershipindesigningand
implementingsmartcontracts.Ifyouhaveintegrity,whynotencouragethe
creationofblockchainreputationsystems?“Votershaveshortmemories,”
63
said
AndreasAntonopoulos.Createbettertransparency,whetheryouareajudge,
attorney,policeofficer,orparliamentarian.Civilservantsandgovernment
employeescouldusesensorsandcamerastotrackpublicassetsandinventoryon
theblockchain,prioritizeinfrastructurerepairs,andallocateresources.Ifyou’re
ayoungperson,don’tgiveupondemocracy.Itmaybebrokenbutit’sfixable.
Focusoncampaignfinancingasastartingplaceforblockchaintransparency,as
bigmoneyiscurrentlythemostfundamentalproblem.Ifyou’reagovernment
contractor,usesmartcontractstocleanupgraftandwasteandevidenceyour
superiorperformance.Thepossibilitiesabound.
Clearlytherewillbeastruggletobringaboutchange,butcitizensofthe
world,unite!Youhaveeverythingtogainthroughtheblockchain!
I
CHAPTER9
FREEINGCULTUREONTHEBLOCKCHAIN:
MUSICTOOUREARS
twasn’tyourtypicalyearling’sbirthdayparty.Thecelebrationtookplaceat
theRoundHouseanhouroutsideLondon,inamassivebarncompletewith
sound-reactiveLEDtree,abouncycastle,andabuffetfitforHenryVIII.The
crowdwaseclectic:a“contact”juggler,twodozentoddlers,theirparents,
neighbors,musicians,andahandfulofblockchaindevelopers.TherewasVinay
Gupta,aScottish-Indianengineerbestknownforinventingthehexayurt,asmall
disasterreliefshelter.Guptaisnowexplainer-in-chiefwhenitcomesto
communicatingblockchaintechnologytothemasses.TherewasalsoPaul
Pacifico,CEOoftheFeaturedArtistsCoalition.Afteracareerinbanking,
Pacificoisnowfightingfortherightsofmusicians.And,ofcourse,therewas
ourhost,ImogenHeap,anaccomplishedcomposerandmusician,voted
“inspirationalartistoftheyear”byreadersofMusicWeek,
1
andthemotherof
one-year-oldScout.
“IwanttoknowthatthestuffI’mmakingcouldbeworthsomethingto
Scoutsomeday,”Heaptoldus.Shewasexpressingherdeepconcernsaboutthe
musicindustry.“It’ssofragmented;there’ssolittleleadership,andthere’sso
muchnegativityaroundthebusinesssideofit,”shesaid.“Everythingistopsy-
turvy.It’sallupsidedown.Theartistsareattheendofthefoodchain.Itjust
doesn’tmakesense.Musiciseverywhere,allthetime.It’sonourphones,it’sin
ourtaxis,it’severywhere.Buttheartistsaregettinglessandless.”
2
Andthereinliestherub.TheInternetisamarvelousmuse,bothamediumof
creativityandachannelforfreespeech.There’snoshortageofideasforwhat
talentedartists,designers,andcoders—andtheirmanyfans—candowithone
anotherontheWorldWideWeb.Noristhereadearthofwaystomakemoney
fromallthiscreativecollaboration.Creativeindustriessuchasmusicpublishing
andrecordinghavebeentappingnewrevenuestreamslikedigitaldownloads
andstreamingaudio.Theproblemisthat,witheachnewintermediary,theartists
getasmallercutandhavelittlesayinthematter.DavidByrneofTalkingHeads
famesummedupthesituationinanop-edpiece:“Itseemstomethatthewhole
modelisunsustainableasameansofsupportingcreativeworkofanykind.Not
justmusic.TheinevitableresultwouldseemtobethattheInternetwillsuckthe
creativecontentoutofthewholeworlduntilnothingisleft.”
3
Thischapterlooksatwaysthatblockchaintechnologiesareputtingartistsat
thecenterofthemodelsotheycannotonly“havetheircake,”thatis,exercise
theirfreedomofexpression,butalso“eatit,too,”maximizingthevalueoftheir
moralandmaterialinterestsintheirintellectualproperty.Inotherwords,to
restoretheirrights.Nomorebig,greedyintermediary,nobiggovernment
censors.Here,wesurveytheculturallandscape—art,journalism,andeducation
—wherebasichumanrightsandlivelihoodshanginthebalance.
FAIRTRADEMUSIC:FROMSTREAMINGMUSICTOMETERING
RIGHTS
“IfScouteverdidendupbeingamusician,howonearthwouldshemake
money?Shewouldn’tbeableto,”saidImogenHeapofherdaughtersmusic
career,wereitdependentonthecurrentmusicindustrymodel.“Weneed
somethingreallysimpleandcore,somethingtrustworthy,forpeopletofeelthat
musicissomethingtheycandoforaliving.”
4
PaulPacificoagreed:“Wewanta
musicindustrythatreflectsthecultural,technological,social,andcommercial
senseofourtimesandallowsforasustainableandviablefutureforcreatorsand
consumersalike.”
5
HeaphasteamedupwithPacifico,VinayGupta,andothers
tocreatethisnewmusicecosystem.
Iftherewereapredictionmarketforinnovations,we’dbetonTeamHeap.In
2009,shebecamethefirstwomantowinaGrammysoloforengineeringher
ownalbum,Ellipse.ShetookallherTwitterfollowerstotheawardceremonyby
wearingwhathasbecomeknownasthe“Twitterdress.”Heroutfit,designedby
MoritzWaldemeyer,featuredanLEDzipperthatstreamedherfans’tweets
aroundhershoulders.In2013,Heapkick-startedthenonprofitMi.Mutoinvent
amusicalglovesystem.Itcombinesmappingsoftwarewithmotiondetection
sensorssothatperformerscancontrollights,music,andvideowithuser-
customizedgestures.Theinventionwontopprizeatthe2015BerlinAwardsfor
WearableIT/FashionTech.Theglovesarequicklycatchingon.PopstarAriana
GrandepostedthismessageonYouTubewithhervideocoverofHeap’s“Hide
andSeek”:“wanttothankmyidol@imogenheapforallowingmetousethe
Mimuglovesonmyfirsteverworldtour.”
6
IfanyonedoubtsHeap’sabilityto
rallyacommunityaroundnewtechnology,thinkagain.
“Wereallyknowwhatwewant,”Heapsaid.“We’renotabunchofairheads
wholiketosmokepotinourlivingroomsandmakemusic.We’rehardworking
entrepreneurs.”
7
Heapviewsblockchaintechnologyasanewplatformfor
creatorsofintellectualpropertytogetfairvalueforit.Smartcontractsin
particularcouldeliminatethemagnitudeofindustrycomplexity,simplifyinga
mission-criticalroleofmusiclabelsinthisecosystem.
RubeGoldbergStrikesAgain:ComplexityintheMusicBusiness
ToparaphraseTalkingHeads,howdidwegethere?Howdoweworkthis?
8
It
startswithabasicproblemforartists—thattheysignedcontractsdraftedforthe
vinylage,whenhugeanalogproductionanddistributioncostsstoodbetween
recordingartistsandtheirpotentialconsumers.Heaptoldus,“WhenIfirstfound
arecordlabel,IthinkImanagedtogetsomethinglikefifteenpercent.Mylast
recorddealafewyearsago,Igotmaybenineteenpercent.Ifpeoplearelucky,
theymightgetmorenow.”
9
Artistsmayhaveassignedtheirrightstoalabelfor
thefulltermofcopyright.IntheStates,that’seitherninety-fiveyearsorthelife
oftheartistplusseventyyears.Imaginealltheunforeseeninnovationsthata
contractwouldhavetocovertokeepthedealfairforartistsandtheirheirs.
Initially,thelabelsweresmall,radiowasking,therecordstorewasqueen,
andartistandrepertoirepersonnelnotonlyscoutedfornewtalentbutalso
oversawtheirartisticdevelopment.Inthelasttwenty-fiveyears,theindustryhas
consolidatedfromthousandsoflabelsdowntothreeglobalsuperpowers—Sony
MusicEntertainment,Vivendi’sUniversalMusic,andWarnerMusicGroup—
andafewhundredindielabels.Thesethreemajorshaveacombined15percent
stakeinSpotify,themostpopularandlucrativestreamingmusicservice.
10
So
theywillgetanextracashinfusionifandwhenSpotifygoespublic.Applehas
becometheworld’slargestmusicretailer,andLiveNationtheworld’slargest
liveentertainmentcompany.
Socontrolofmusiccopyrightisconcentratedinthefew.Thelabelsandthe
tourpromotioncompanieshavestartedaskingfor360-degreedealsfromartists.
Thatmeansgettingacutofalltherevenuesanartistgenerates—publishing
rightstotheunderlyingcomposition,usagerightstothesoundrecording,
performancerightswhentheartistgoesontour,potentiallyevenmerchandise
andsponsorshiprights—regardlessofwhethertheyinvestedinthecultivationof
thoserights.
Withconsolidationcomessystemsintegration,andthat’snevereasy.Each
conglomeratehasitsownprocessofaccountinganditsownversionofacontract
andaroyaltystatement,makingside-by-sidecomparisonsachallenge.“Wehave
abigprobleminthattheindustryisveryfragmented.Withallofitsdifferent
platforms,it’sabitofanightmare,”Heapsaid.
11
Thesesystemsmust
accommodateinnovationinproduction,format,distribution,andcontextof
usage.Butrarelyisanelementimmediatelyoutmoded,andsoeverypartymust
maintaintwoormoremodelsconcurrently,themostobvioustwobeingthe
physicalandthedigital.
Toaddtothecomplexity,therearemanymembersofthesupplychain,not
justthepublishersandtheperformancerightsorganizations(PROs)—
organizationsthatmonitorpublicperformancesofmusicandcollect
performanceroyaltiessuchasthenot-for-profitAmericanSocietyofComposers,
AuthorsandPublishers(ASCAP),not-for-profitBroadcastMusic,Inc.(BMI),
andtheenterpriseformerlyknownastheSocietyofEuropeanStageAuthorsand
Composers(SESAC)—butalsotheproducersandthestudios,thevenues,the
concerttourorganizersandpromoters,thewholesalers,thedistributors,andthe
agents,eachwithitsowncontract,accounting,andreportingsystem.Theytake
theircutandpassalongtheremaindertotheartists’managersandagents.
Whateversleftgoestotheartiststhemselves,perthetermsoftheircontracts.
That’sright—theartististhelasttobepaid.Itcouldbesixtoeighteenmonths
beforethefirstroyaltycheckarrives,dependingonthetimingofthereleaseand
thelabel’saccountingcycle.
Finally,anentirelynewlayerofintermediaries—technologycompanieslike
YouTubeorSpotify—insertedthemselvesintothesupplychainbetweenartists
andlabels,slicingtheartists’pieceofthepieeventhinner.Let’slookat
streamingmusic.Spotifypaysonaveragebetween$0.006and$0.0084per
streamtorightsholders,usuallythelabels.
12
Thecalculationofthisinitial
paymentmayseemtransparentatfirst.Spotify’ssitestatesthatitpays70
percentofitsadvertisingandsubscriptionrevenuestorightsholders.Butwe
revieweditsforty-one-page“DigitalAudio/VideoDistributionAgreement”with
SonyUSAInc.,andthepayoutofsome$42.5millioninnonrecoupable
advancestoSonyartistsisanythingbutclear.Infact,thefirstparagraphofthe
agreementcallsforconfidentiality.ItappearsthatneitherSpotifynorSonycan
informSony’sartistsoftheimpactofthisagreementonartists’revenues.Rich
Bengloff,presidentoftheAmericanAssociationofIndependentMusic,said
that,inhisexperience,thelabelsdon’tusuallysharemoneynotdirectlytiedto
usage.
13
IndustryanalystMarkMulligansaid,“Artistsaregoingtofeelpainfor
atleastanotherfourtofiveyears,justastheydidinthefirstfourtofiveyears
afteriTuneslaunched.”
14
Sowhatvaluedothelabelsadd?Certainly,theyattempttomanagethis
complexity,policepiracy,andenforcerights.Forexample,UniversalMusic
PublishingGrouphaddedicatedathirdofitsworkforcetoroyaltyandcopyright
administrationinlocalmarketsaroundtheworld.
15
Universalrecentlydeployed
anartist’sportalthatallowsartiststopeekatthestatusoftheirroyaltiesandto
requestadvancesagainstfuturerevenuesfornofee.Theportalalsoprovides
“insightsintoSpotifyusage:howmanytimesasongstreams,whatkindsof
peoplearestreamingit,whatelseisonthoselisteners’playlists,andhow
specificsongsresonatewithcertainaudiences.”Universalhasdevotedsixteen
stafferstoupgradingtheportalandinterpretingdataforartists.
16
Thelabelsalso
havehugeteamsoflawyersandlobbyists.Theycanlaunchnewartistsglobally,
demandingtheirboilerplateterms,marketingthroughlocalforeignmedia,
distributingtheirmusicinforeignmarkets,licensingrightstoforeignpublishers,
supportinginternationaltours,andaggregatingalltherevenues.Thecostof
policingroyaltieshasincreasedwiththecomplexityofthebusiness—thatisa
costthatdirectlyaffectsartistseverywhere,becauseitfunctionslikeatax.
Smartcontractsontheblockchaincaneliminatethemagnitudeofthis
complexity,replacingamission-criticalroleofmusiclabelsinthisecosystem.
AccordingtoImogenHeap,“Ifyou’reacomputerprogram,apieceofsoftware,
adatabase...theseissuesdisappear,asit’sjustmathshalfthetime.Thisbit
goestothisperson...anditdoesn’ttakeayearortwotoreachtheartist,writer,
performer....It’sinstantbecauseit’sautomatedandverified.Ontopofthis,
culture-shiftingnewmusicdistributionservicesgatherreallyusefuldatafrom
artists’fans,whichcouldmassivelyhelpusbemoreefficientiftheartists
themselvescouldgettoit.”
17
That’sthefutureofmusicontheblockchain.
EmergenceofaNewMusicBusinessModel
Thecombinationofblockchain-basedplatformsandsmartcontracts—plusthe
artisticcommunity’sstandardsofinclusion,integrity,andtransparencyindeal
making,privacy,security,respectofrights,andfairexchangeofvalue—could
enableartistsandtheircollaboratorstoformanewmusicecosystem.
“Wouldn’titbeniceifIcouldjustdecidehowI’dlikemymusictobe
sharedorexperienced?”Heapasked.“Tosimplyuploadapieceofmusic,for
example,andallitsrelatedcontenttooneplaceonline,foralltotapintoand
derivefrom.Usagerights,ownership,theequivalentoftoday’slinernotes.
Video,latestbiography,”andallotherparties—notjustrecordlabels,music
publishers,andtourpromotersbutalsocorporationslookingforjingles,TV
producerslookingforsoundtracks,mobileserviceproviderslookingfor
ringtones,andthemanyfanslookingtodofanvideos—coulddecidewhetherto
agreetoHeap’stermsofuse.“Wouldn’titbeamazingtofeelthepresenceofthe
artist,thatiftheymakethatdecisionabouttheirmusic,it’sreallyfeltinareal
physicalsense,evenfromonedaytothenext?”shesaid.“Imaydecide,hey,it’s
mybirthdaytoday,allmymusicisforfreeor...ifyou’reundersixteenorover
sixty,it’sonme!Ortodivertallpaymentsduetometoarelieffund,withjusta
fewalterationsofwordinginthesmartcontract.”
18
That’sthegoalofdesigninganartist-centricmodelontheblockchain,nota
modelcenteredonmusiclabelsortechdistributors.Artistscouldproducemusic
andbepaidfairlyforthevaluetheycreate,andloversofmusiccouldconsume,
share,remix,andotherwiseenjoywhattheyloveandpayafairvalue.This
modelwouldn’texcludelabelsordigitaldistributors,buttheywouldbeequal
ratherthandominantmembersoftheecosystem.
Thenewmusicindustryisnotapipedream.InOctober2015,Heaplaunched
herfirstexperimentbyreleasinghersong“TinyHuman,”andallrelateddata—
theinstrumentalversion,sevenstereostems,frontcoverimage,musicvideo,
linernotesonmusicians,gear,credits,lyrics,acknowledgments,anduseful
links,andthestorybehindthesong—ontheInternet.
19
Thesedetailswould
increaseherdiscoverabilityontheInternet,thatis,tohelppotentialcollaborators
tofindher.
Heapinvitedfans,developers,andservicestouploadhersongtotheir
variousplatformsandtosharetheirworkaswell.Shegrantedthem
nonexclusiverightstocreateanImogenHeapartistprofile,providedthatthey
gaveherthelogindetailsandpermissionsafteruploadingherfilestotheir
systems.Iftheyexpectedrevenuestreams,thensheaskedthemtoprovide
paymentmodels,percentages,andamountssothatshecouldfactorthosedetails
intoheranalysisoftheexperiment.Finally,shewelcomeddonationstoher
bitcoinaddressandpromisedtodirecthalftheproceedstohercharitable
foundation,Mycelia,hernameforthisnewecosystem.Usagedataand
participantbehaviorwouldinformthenextstageofdevelopmentonthe
blockchain.
VariouscompaniesareworkingonitsdesignandcollaboratingwithHeap
andotherforward-thinkingmusicians.Thisnewecosystemhasanumberof
featuresthattheexistingindustrylacks:
ValueTemplatestoconstructdealsthatrespecttheartistasentrepreneurand
equalpartnerinanyventure,integraltovaluecreation.Good-byearchaicpaper
contractsthatperpetuateunfairbeginnings.“Nomoreclawingbackroyalty
percentages,”saidHeap.
InclusiveRoyaltiesthatdividerevenuesfairlyaccordingtoeachperson’s
contributiontothecreativeprocess,notonlycomposersandperformers,butalso
theotherartistsandengineers.Everyonecouldhaveanupsideinasmashhit,not
justthelabelsandthedistributors.
TransparentLedgersdistributedontheblockchainsothateveryonecould
seehowmuchrevenueasongwasgenerating,thetimingandmagnitudeofthe
revenuestreams,andwhowasgettingwhatpercentage.Nomorearchaicand
proprietarypaper-basedaccountingsystemstohidebehind.Separatetagsforthe
natureofrevenues,fromwork-made-for-hiretoroyaltyrevenues.Easy
accounting,easyauditing,easypaymentoftaxes.
Micrometering,Micromonetizingfunctionalitytostreamtherevenues,not
justthemusic.Ifthemusicweremetered,whereconsumersmademicro-or
picopaymentsperplay,theroyaltypaymentscouldbestreamedimmediatelyto
theartistsandcontributors.Nomorepaymentdelays,nomorebiannualor
quarterlyroyaltychecks,nomorecrypticroyaltystatements.Nomorehand-to-
mouthartists!BlockchaintheoristAndreasAntonopoulosgavethisexample:
“StreamiuminArgentinaisastreamingvideoservice.Itallowsvideoproducers
tochargethousandthsofapennyfordownloading,say,twohundred
millisecondsoflivestreamingvideo.Itusesmultisig[nature],time-locked
transactions,atomicity,andsumintegritytoimplementitsscheme.Producers
deliveronlythevideothathasactuallybeenpaidfor,andconsumerspayfor
onlythevideoactuallyconsumed.Theyautomaticallyrenegotiatethatcontract
fivetimesasecond.Ifeitherofthemdropsoutatanypointintime,thecontract
endsandtheycashinthemostadvantageoustransactionbetweenthem.”
20
RichDatabasesthatcaninterfacewithoneanotherandassociatethecore
copyrightedmaterial—lyrics,composition,andrecordings—withalltheir
metadata,thelinernotes,theartworkandphotographs,theindividualtracks,the
rightsthatthecomposerandtheperformerarewillingtolicense,thetermsof
licensing,contactinformation,andsoforth—inthedigitalledgerforalltosee.
Nomoreincompletedatabasesofrights.Rightsavailabilityatyourfingertips!
Rightsholderswouldbeeasytofind.
UsageDataAnalyticsinthehandsofartistsatlast,toattracttheright
advertisersandsponsors,organizetours,planpromotionsandcrowdfunding
resourcesandfuturecreativecollaborationswithotherartists.Themodelcould
capture“somuchofthislostdataaroundtheworld,likewhereareyourfans,
howoldarethey,whataretheyinterestedin,”saidHeap.“Withthatinformation,
wecouldreallytailor-maketours,wecouldconnectupwithbrandsand
initiativesthatresonatewithus,orpromoteartists,products,orcharitieswelove
andsupport.I’mnottalkingnamesande-mailaddressestypeofinfo,abitmore
zoomedoutbutstillvitallyusefuldata.Wecouldcross-referenceitwithother
bands’dataforallkindsofinterestingusesforfansandartistsalike!”
21
DigitalRightsManagement,thatis,ameansofmanagingdigitalrights,not
theanticonsumerDRMsoftwarewrapperthatwasallaboutrestrictingusage.
We’retalkingaboutthedeploymentofsmartcontractsthatactuallymanage
rightsandmaximizethevalueofpublishing,recording,performance,
merchandise,andallotherrights.Thisincludestermsofthird-partyengagement
forrecordlabelsanddistributionservices:labelsanddistributorscoulddecide
whethertooptintoanartist’stermsofuseandexpectationsforservice.Ifartists
don’twantadvertisingtointerruptthemusicexperience,thentheycanforbidit.
Iftheywantacertaincutofadrevenue,thentheycaninsistonit.Iftheywant
oneoftheselargefirmstohandlelicensing,distribution,andcopyright
enforcementincertainterritoriessuchasChina,thentheycandothat.Theycan
alsosettermlimits.Ifthefirmsdon’tdeliveracertainlevelofrevenue,thenthe
contractscanautomaticallyterminate.Artistsalsoneedautomatedsubsidiary
rightsmanagement,whereverpossibleordesired,whereprospectivelicensees
eitheracceptorrejecttheartist’stermsofuseandpayment.Thecontractitself
enforceseachdealandcannotifytheartistofanybreachesandterminations.
Auction/DynamicPricingMechanismstoexperimentwithpromotionsand
versioningofcontent,evenpegsubsidiaryrightsroyaltypercentagestothe
demandofasong.Forexample,ifconsumerdownloadsofasongspike,thenan
advertiserwholicensedthatsongforacommercialautomaticallyhastopay
morewhenthecommercialruns.
ReputationSystemthatcullsdatafromabitcoinaddress’stransaction
historyandsocialmedia,tocreateareputationscoreforthataddress.Artistswill
beabletoestablishtheirowncredibilityaswellasthatofprospectivepartnersin
dealmaking,whetheramongartistsascollaboratorsorbetweenartistsand
consumers,labels,merchants,advertisers,sponsors,licensees,andsoforth.
Usingmultisigsmartcontracts,artistscouldrefrainfromdoingdealswith
entitiesthatdon’tmeetcertainreputationalstandardsordon’thavenecessary
fundingintheiraccounts.
Thekeypointofthisnewfairmusicindustryisthattheartistsareatthe
centeroftheirownecosystem,notattheedgesofmanyothers.“Iseeaplacefor
SpotifyandYouTube.Iseeaplaceforcuration,andIseeaplaceforuser-
generatedcontent,”saidHeap.“Iseeaplaceforrecordcompaniesbecausewe
stillneedpeopletosiftthroughthehundredsofmillionsofhoursofmusic,or
billionsofbitsofmusicandartallovertheplanetbeingcreatedeveryday.”
22
Withsoftwaretemplates,theycanengagecreativecollaborators,thebigmusic
labels,thebigdistributors,andthemanysmallerintermediariesastheyseefiton
theblockchain.
TheSelf-LaunchedArtist:SignsoftheNewMusicParadigm
OneofImogenHeap’sfriends,ZoëKeating,Canadian-borncellistand
composer,hasalwayscontrolledherownmusic.Sheownsallherpublishing
rightsandthemasterstoherrecordings.Shecarefullyorchestratesherown
marketing,sales,licensing,anddistributionstrategy.Givenallthecomplexity
mentionedabove,we’rehugelyimpressed.“Anartistlikemecouldn’texist
withouttechnology.Icanjustrecordmusicinmybasementandreleaseitonthe
Internet,”KeatingtoldTheGuardian.Forher,theInternethasleveledthe
playingfieldforindependentartists,butherexperiencewiththebigonline
musicdistributorshasnotdifferedgreatlyfromImogenHeap’swiththe
traditionallabels.“Thisisnotjustanexcuseforservicestoreplicatethepayment
landscapesofthepast.It’snotanexcusetotakeadvantageofthosewithout
power,”saidKeating.“Corporationsdohavearesponsibilitynotjusttotheir
shareholdersbuttotheworldatlarge,andtoartists.”
23
KeatingwasalludingtothenewcontractthatGoogle’sYouTubepresented
toher.Itwaswrappedinnondisclosure.Forseveralyears,she’sdistributedher
musiconYouTubeandmonetizedthird-partyuploadsofhermaterialusing
ContentID,aprogramthatautomaticallyalertsrightsholderstoinstancesof
potentialcopyrightinfringement.Keatingwasn’tconcernedaboutpiracy,file
sharing,orroyalties.Toher,commercialstreamingwasameansofpromotion,
reachingnewaudiences,andanalyzingusagedata.Themusicaggregatorsand
thehitmakersweretheoneswhomadesignificantmoneybyofferingcomplete
catalogsthroughon-demandservices.Nother.Thelargestshareofherrevenues
hadalwayscomefromhard-corefanswho’dpayfromtwentydollarstoa
hundredforanewalbum.ShewouldreleasenewworkonBandcampfirst,then
uploadittoiTunes,andfinallymakeselectionsavailableelsewhere—YouTube,
Spotify,Pandora.Thatwindowingstrategy—makingcontentavailable
exclusivelyinaparticularchannelforaperiodoftime—hadprovenitself
effectiveforherandherhard-corefans.Shecouldthankherexistingsupporters
andcultivatenewrelationships.
YouTubewaslaunchinganewsubscriptionservice,MusicKey,whereusers
wouldpayafeetoavoidadvertising.IfKeatingwantedtocontinuemonetizing
herworkthroughYouTube,thenshewouldhavetoagreetoYouTube’sterms:
includeherentirecatalog,andstopwindowingelsewhere.Itwasallornothing.
Sheknewthattheindependentlabelsweren’thappyeitheraboutthenew
licensingterms,buttheyweremoreupsetbythefinancialrepercussions.
Keatingwantedtomaintaincontroloverhermusic,onherterms.
Shesawthepotentialofthebitcoinblockchainasatechnologythatcould
ensurethatgoal,startingwithitstransparency.“Ijustbelieveintransparencyin
everything,”shetoldForbes.“Howcanwebuildafutureecosystemwithout
knowinghowthecurrentoneactuallyworks?”
24
Forexample,onYouTube,
Keatingestimatesthattherearefifteenthousandvideos—danceperformances,
films,TVshows,artprojects,gamingsessions—thatusehermusicas
soundtrackswithoutherauthorization.Sheshouldbeabletoleverageallthat
enthusiasmforherwork,butonlyYouTubeknowsexactlyhowpopularher
musicis.Nielsen’sSoundScanisonlyonefacetofamultidimensionalpicture.
LikeHeap,Keatingwantstoregistercopyrightandleveragecopyright
metadataontheblockchain.Thatway,peoplecouldmoreeasilytrackherdown
asthecopyrightholder.Shecouldthentrackderivativeworksthroughthe
blockchain.Adistributedledgerofmusicmetadatacouldtracknotonlywho
createdwhat,butwhoelsewasmateriallyinvolved.Sheimaginesvisualizing
usageandrelationships,calculatingtherealvalueofasongfordynamicpricing,
andenablingongoingmicropaymentstocollaboratorsandinvestorswithout
third-partyblackboxeslikeASCAPorBMI.
25
Again,we’renotsayingthatthereisnoroleforlabelsortechnology
companies,andthatartistscouldjustmakeitontheirowninapurelypeer-to-
peerecosystem.Ratherwe’retalkingaboutanewkindofmusicecosystem
centeredontheartists,wheretheycontroltheirownfateandreceivefair
compensationforthevaluetheycreate.Blockchaintechnologywillnotcreatea
newstandardforhowartistsgetcompensated.Instead,itwillliberatethemto
chooseandcustomizeaninfinitearrayofsolutionsthatworkfortheirspecific
needsandbeliefs.Theycangiveitawayforfree,ormicromonetizeeverything
—butit’stheirchoice,notthelabel’sorthedistributors.
OtherElementsoftheNewMusicEcosystem
BasicCopyrightRegistration
Therearetwofundamentaldimensionstomusiccopyright.Thefirstisthe
worldwiderighttotheunderlyingcomposition—themusicalnotesandthelyrics
—inallformsandlanguages,andthat’susuallyheldbythecomposer-lyricist.
Themusicandthelyricscanbecopyrightedseparately.Thecomposer-lyricist
makesroyaltieswheneversomeonerecordsorperformsthesong,buysthesheet
music,adaptsitintoanothergenre(e.g.,elevatorMuzak),translatesitintoa
foreignlanguage,orincludesthemusicinananthologyortextbook.Thesecond
istheworldwiderighttothesoundrecording,aperformancecapturedand
preservedinsomemediumlikeadigitalfileormusicvideo.Therecordingis
usuallycopyrightedbytheperformerorbandmembers,whoearnroyaltieswhen
therecordingisplayedontheradio,television,ortheInternet;syncedwithTV
shows,commercials,orvideogames;streamed,downloaded,orpurchasedin
somehardmediumsuchasvinyl,CD,orDVD.
ZoëKeating’slevelofautonomywaswhatmotivatedToronto’sindustrial
rockband22Hertztoturntotheblockchain.InCanada,registeringcopyrightfor
onesongcostsfiftyloonies,andthecertificatecontainsonlythetitleofthe
work.Theband’sfounder,RalfMuller,didn’tthinkthat’dbehelpfulincourt,if
anyoneeverusedthelyricsormelody.Sohedecidedtogothehashingroute,by
creatingahashofthewholesongusingsomethingcalledanOP_RETURN
feature—andencodeditintotheblockchaininstead.Ifanyoneeverusedhis
wordsormusic,hecouldsimplydemonstratehisownershipbypointingtothe
transactionontheblockchain,doinganotherhashofthesong,andcomparingthe
secondhashwiththehashontheblockchain.Theywouldbeidentical.“Once
youencodeahashintheOP_RETURNandblockuponblockgetwrittenontop,
itisbasicallyimpossibletogobackandchangeanything.This,tome,is
incredible.”Whenaskedwhytheband’sonlinestorewasacceptingbitcoinand
offeringdiscountstobitcoinusers,Mullerrespondedemphatically,“I’mnotinto
‘businessasusual.’”
26
DigitalContentManagementSystem
NorisColu,adigitalcontentmanagementplatformbasedonbitcoinblockchain
technology.Itprovidesdevelopersandenterpriseswithtoolsforaccessingand
managingdigitalassetsincludingcopyright,eventtickets,andgiftcards—much
ofwhatatrulydistributedmusicindustrywouldneed.Coluhaspartneredwith
musictechnologyleaderRevelatortobuildarightsmanagementapplication
programminginterface(API).ThegoalistorealizewhatImogenHeapandZoë
Keatingwereimagining—thedemystificationofrightsownership,digital
distribution,andactualusage.TheAPIwillalsoprovideincumbentsameansof
providingthemuch-called-fortransparencyandefficiency.“Weareveryexcited
aboutthepotentialforColu’splatformtosimplifythemanagementofmusic
rights,startingwiththoseassociatedwithsongwritersandtheircompositions,”
saidBrunoGuez,founderandCEOofRevelator.“Coluhasmadethecomplex
technologyoftheblockchainaccessibleforintegrationsintoplatformslikeours,
andwe’relookingforwardtoexploringallthewaysitcanimproveserviceto
ourclients.”
27
TheNewArtistsandRepertoire(A&R)
Finally,akeyaspectofanycreativeindustryistalentscoutingandcoaching.
Musiciansnaturallyembracementoringandplayan“artistsandrepertoire”role
insuchcompetitionsasTheVoice.TheblockchainsupportsthistypeofA&R
withusagealgorithms.ConsiderPeerTracks.Accordingtoitslandingpage,itis
“theultimateonestopmusicplatform”forbothmusicloversandartists.
PeerTracksattachesasmartcontracttoeverysongthatanartistuploads,andthe
contractautomaticallydivviesuptherevenuesaccordingtowhateverdealthe
performermadewiththelyricist,thecomposer,andothermembersoftheband.
Artistscreatetheirowntokens,bearingtheirnameandlikenesssimilartoa
virtualbaseballcard.Tokensarecollectibles.Theartistsetsthenumberof
availabletokens.Sotherecouldbelimitededitions,sotospeak.Theconceptis
simple:createastoreofvalue,thevaluationofwhichcorrelatestotheartist’s
popularity.
28
Usersgetfullaccess,ondemand,totheentirePeerTracksmusiccatalogfor
freewithoutadvertisinginterruptions.Theycansavesongsandplaylistsfor
offlineuseanddownloadanysongoralbumfromthecatalog.Unlikewith
SpotifyoriTunes,userscanalsopurchasetokensofartistsandtradethese
tokenslikebaseballcards.Asanartist’sstarrises,thevalueofthetokensrises,
andsouserscouldpotentiallybenefitfinanciallyfromsupportingartistsbefore
theybecomefamous.LovinganartisttranslatesintoVIPtreatment,perquisites,
andfreebiesfromartists.Thisincentiveturnspeoplewhowouldbepassive
listenersonSpotifyintoactivepromotersandbuildsalong-term,engagedfan
base.PeerTracksintendstopayartistsmoreforstreamsanddownloads—
specifically95percentofrevenues—andtopaytheminstantaneouslyonthe
blockchain.Artistscansettheirownpriceformusicdownloadsand
merchandise.PeerTracksclaimsthat“swarmsofprofitdriventalent
scouts/curatorslookingforthenexthotstar/token”willhearanewartist’ssong
becausePeerTracksuserswillvotethemtovisibility.
29
ARTLERYFORARTLOVERS:CONNECTINGARTISTSAND
PATRONS
Thetraditionalartmarketisnotoriouslyexclusiveandopaque.Arelativelysmall
numberofartistsandcollectorsrepresentanincrediblylargepercentageofthe
market,andthereareveryfew,narrow,andsometimescircuitouspathsfor
emergingartiststoentertheartworld.Evenso,theopennessandgenerally
unregulatednatureoftheartmarketencouragesexperimentingwithnew
conceptsandnewmedia,democratizingtheartmarketononehand,and
democratizingcapitalmarketsontheother,withbothhandsonthe
transformativeanddisruptivepowerofthebitcoinblockchain.
Artlerydescribesitselfasanetworkofartistswhohaveagreedtoshare
someoftheirearningswithpatronsandpeerswhoengagesociallywiththeir
works.
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Artlery’sgoalistomintanart-as-asset-backed-currencyonthe
blockchainbyengagingartloversaspartialownersandstakeholdersoftheart
withwhichtheyinteract.Itsapproachistoprovidetherightincentivesforall
sidesofthemarket—artists,patrons,curators,andvenuessuchasgalleries,
museums,studios,andfairs—ratherthanprovideperverseincentivesforone
partyattheexpenseoftheothers.Tofosterpatronageandbuildreputationforan
artist,Artlerystagesinitialpublicofferings(IPOs)ofdigitalpiecesofthat
artist’swork.Artlery’sappenablesartistssuchasJaZoNFrings,DavidPerea,
KeithHollander,BentonCBainbridge,andtheBazaarTeenstoreplicatetheir
physicalworksdigitally,breakthemintomanypieceslikeapicturepuzzle,and
apportionthemtopatronsbasedoneachpatron’slevelofappreciationfrom
withintheArtleryapp.Duringawork’sIPOperiod,patronscanaccumulate
interestuptothespecifiedpercentageofthepiecethattheartistinitiallygiftedto
thecommunity.Astheplatformmatures,Artleryplanstoallowforthetransfer
andsaleoftheaccumulatedinterestsintheworks.
Atthe2015StanfordBlockchainSummitsponsoredbyArtlery,Dondecided
tobackaworkbyAnselmSkogstad,titledEUR/USD3081,anartisticrendering
ofaeurocurrencynotemagnifiedandprintedonafifty-eight-by-forty-four-inch
Dibondaluminumcomposite.
BuyingArtThroughtheBitcoinBlockchain:HowItWorks
Topurchasethepiece,Donopenedhisbitcoinwalletapp.Heusedittocreatea
messagethatspecifiedtheamountofbitcoinrepresentingthepurchasepriceof
thepiece,designatedArtlery’spublickeyastherecipientofthatbitcoin,and
usedhisprivatekeyto“sign”orauthenticatethemessage.Dondouble-checked
allthefieldsbecause,unliketraditionalpaymentmethods,therewasno
reversingthisbitcointransaction.Thenhebroadcastthemessagenottohis
Canadianbankbuttotheentirenetworkofcomputersrunningthefullbitcoin
blockchain.
Somepeoplerefertothesecomputersasnodes,wheresomenodesare
donatingtheirprocessingpowertosolvethemathproblemassociatedwith
creatingablock.Aswe’veexplained,thebitcoincommunityreferstothemas
minersandtotheirproblem-solvingworkasmining,asingoldmining.It’san
awkwardanalogybecauseitconjuresimagesofexpertswhosetalentmight
confersomecompetitiveadvantageovernoobs(newbies).Itdoesn’t.Eachminer
isrunningthesoftwarelikeautilityfunctioninthebackground,andthesoftware
isdoingallthecomputations.Seriousminersconfiguretheirmachinesto
optimizetheirprocessingpower,minimizetheirenergyconsumption,and
leveragehigh-speednetworkconnectivity.Beyondthat,there’sreallynohuman
aptitudenecessaryandnohumaninterferencetolerated.
Notallnodesaremining.Infact,thevastmajorityofnodesonthebitcoin
networkaresimplyperformingbitcoinruleverificationofreceiveddatabefore
routingthedatatopeerconnections.Thenetworkverifiedthetwobitsofdata—
thatDoncontrolledtheamountofbitcoinspecifiedandauthorizedthe
transaction—andrecognizedDon’smessageasatransaction.Theminersthen
racetoconvertunorderedandunrecordedtransactionsintotransactionsordered
andrecordedinablockofdata.Eachblockhadtoincludethedigestorhashof
thepreviousblockoftransactions,aswellasarandomnumberknownasa
nonce.Towintherace,acomputermustcreateahashoftheblock;thishash
musthaveacertain,butarbitrary,numberofzerosatthebeginning.It’s
unpredictablewhichnoncewillproduceahashwiththecorrectnumberofzeros,
andsothecomputershavetotrydifferentnoncesuntiltheystumbleuponthe
rightvalue.It’sreallylikewinningthelotterybecausethere’snoskillinvolved.
However,ahumanbeingcanincreaseherchanceofwinningthelotteryby
buyingastate-of-the-artcomputerprocessorthatspecializesinsolvingbitcoin’s
mathproblems;buyingmoretickets,thatis,runningmultiplehigh-powered
nodes;or,ashumanbeingsoftendo,poolinghernodewithothernodes—like
colleaguesattheoffice—andagreeingtosplitthepotifoneoftheirnodeswins.
Sowinningisamatterofluck,processingpower,andthesizeofone’smining
pool.
Hashrateisameasureofthetotalprocessingpowerofthebitcoinnetwork.
Thehigherthetotalaggregatehashrateoftheentirenetwork,themoredifficult
itistofindtherightnonce.Whenaminerfindsahashwiththecorrectnumber
ofzeros,itsharesitsproofofworkwithallotherminersonthenetwork.Thisis
theotherbigscientificbreakthroughindistributedcomputing:usingproofof
worktoachievenetworkconsensus.It’sknownastheByzantineGenerals’
Problem.Theotherminerssignaltheiracceptanceoftheblockbyfocusingon
assemblingthenextblock,whichhastoincludethehashofthenewlymade
block.JustasDon’spublicandprivatekeysareuniquetohim,thehashofeach
blockisunique:itworkslikeacryptographicfingerprintthatmakesallthe
transactionsintheblockverifiable.Notwoblockfingerprintsarethesame.The
winningminerreceivesasetquantityofnewbitcoinsasareward—thesoftware
itselfmintsandallocatesthenewcoins—andthehashedblockisappendedto
thechain.
So,withintenminutesofDon’sbroadcastinghismessage,heandArtlery
receivedaconfirmationthatDon’sbitcointransactioncreatedwhatisreferredto
as“unspenttransactionoutput,”meaningthatArtlerycanspenditbydoingwhat
Donjustdid—broadcastingamessagethatspecifiestheamounttosendandthe
addressoftherecipient,andauthorizingthetransactionwithArtlery’spublic
key.IftheartistandthepatronsknewbothDon’sandArtlery’spublickeys,then
theycouldseethatthedealbetweenthemwentthroughandcouldseethe
amountofthetransaction.That’swhywecallitapublicledger—alltransactions
aretransparent—andpseudonymous,inthatwecanseetheparties’addresses,
thoughwecan’tseethenamesofthepersonsbehindthem.Everysubsequent
blockservedasfurtherconfirmationoftheirtransaction.
ProfileoftheNext-GenArtPatron:RedefiningMoney
NowDonownsapercentageinterestintherightsofanartisticrenderingofa
euro.Whenthephysicalworksells,theartist,thevenue,Don,andhisvirtual
patronsallreceiveaportionofthesaleaccordingtotheirlevelofparticipation.
Inotherwords,patronparticipationmatters.Patronswhointeractwiththeartist
andthework,whosharetheirappreciationinsocialnetworks,whosparkothers
toengagewithbothartistandart,andwhoessentiallyservetopromotethe
artist’sbrand,receivemorethandoesapassivepatronwhovieweditonceonline
andboughtastake.We’renotsurewhetherwritingaboutitinthisbookcounts
directlytowardDon’sparticipationpoints.Artlerywantssignalsofappreciation
—intheformofpositivereferencestoartistsandtheirworks—tocorrelatewith
theappreciationinvalueoftheworkitself,andsoperhapsfutureplatform
releaseswilltakeexampleslikeoursintoaccount.Artleryisinitially
concentratingongiftingapercentageofeachpiece’ssale.Futurereleasesofthe
platformwillallowpatronstopurchaseownershipstakesinartworkdirectly,
perhapssharingportionsofsubscriptionroyaltyrevenueorcopyrightlicensing
ofthework.
Byinvolvingmultiplepartiesdirectly,includingpatrons,intheprocess,and
engagingthemasstakeholders,Artleryisfocusingmoreeyesonaccounting.
Theblockchainasapublic,distributedledgerensuresopen,accurate,andtimely
processingoftransactions.Aspayoutsexpandbeyondfirstsale,secondarysale,
andsubsidiaryrightssuchasprintsandmerchandising,individualartistswill
neverbeactingalone.Theywillhaveacommunityofpatronstakeholders
behindthemtonegotiateandenforcetheircontractualrights.
Artleryutilizesthebitcoinblockchaininseveralways.First,itregistersthe
provenanceoftheartasmetadataontheblockchainthroughapartnershipand
APIintegrationwithanotherbitcoinstart-up,Ascribe.io,andituploadsthe
payouttablesothatallstakeholdersarepaidimmediatelyaccordingtotheirasset
shareswithimmediatetransparencyforallparties.Itisexploringvarious
techniquesforencodingthisinformation,suchasabitcoinscriptinside
transactions.Whileitsinitialtargetmarketisfineart,Artleryhassignificant
tractioninothercopyrightindustriessuchasmusic,books,andmovies,whichit
willtargetthroughthereleaseofitsownAPI.
PRIVACY,FREESPEECH,ANDFREEPRESSONTHEBLOCKCHAIN
Personalprivacy,freespeech,andfreepressareessentialtoanopen,free,and
prosperoussociety.Ononehand,citizensmustbeabletocommunicateprivately
andanonymously.Ontheotherhand,theymustbeabletospeakfreelyand
securelywithoutfearofrepercussion.Onlinecensorship,thehackingoflarge
institutionsandcivilsociety,andEdwardSnowden’srevelationsofmassand
targetedsurveillanceanddatafrackinghavedrivencitizensofwell-established
democraciestoseekanonymityandencryptiontechnologies.Thesetoolsenable
themtodisguisetheiridentitiesandscrambletheirmessagesintransitandin
storagesothatonlyauthorizedpersonsmayaccessthem.
Here’stherub—encryptiontechnologiesareeithernotlegalforindividual
useornotreadilyavailableinthosecountrieswhosecitizensneedthemmost.
TheWassenaarArrangement,amultilateralexportcontrolregimethat
technologicallyadvancednationsagreedto,governstheexportof“dualuse”
products,thatis,thosethatcouldbedeployedforbothgoodandevil.
Wassenaarsoriginalgoalwastokeephigh-techproductsoutofthehandsof
dictatorsinNorthKorea,Libya,Iran,andIraq.Anonymityandencryption
technologiessuchaspublickeyinfrastructurewereconsidereddualuse.
Today,incountriessuchasRussiaandChina,bothindividualsand
corporations—includingforeignfirms—mustseekauthorizationtousethem.In
countrieswheretheiruseisdiscretionary,governments—eventheObama
administration—haveaskedtechfirmstoinclude“backdooraccess,”thatis,a
secretmeansofbypassingthenormalauthenticationprocess(e.g.,loggingon
withapasswordorothersecuritycode)andgainingremoteaccesstoacomputer
anditsdatawithoutauthorizationordetection.ItisfarmoreinsidiousthanBig
Brother,becauseatleasteverybodyknewthatBigBrotherwaswatching.
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Here,techfirmsaren’tsupposedtotellusersthatthere’sabackdoor.Nodoubt
hackerslookforthem,findthem,andusethem,too.
“Thetrendlinesregardingsecurityandprivacyonlinearedeeplyworrying,”
wroteDavidKaye,SpecialRapporteuroftheOfficeoftheUnitedNationsHigh
CommissionerforHumanRights.“Encryptedandanonymouscommunications
mayfrustratelawenforcementandcounter-terrorismofficials,andthey
complicatesurveillance,butStateauthoritieshavenotgenerallyidentified
situations—eveningeneralterms,giventhepotentialneedforconfidentiality—
wherearestrictionhasbeennecessarytoachievealegitimategoal.”
32
Hewent
ontosaythatlawenforcementandcounterterrorismagencieshavecometo
downplaygoodold-fashioneddetectiveworkanddeterrencemeasures,including
transnationalcooperation.
33
Notsurprisingly,onglobalmeasuresofthepreservationofpoliticaland
personalrights—thatis,privacyandthefreedomsofspeech,assembly,andthe
press,andthetoleranceofotherreligions,immigrants,politicalrefugees,and
homosexuals—Russiaranks114th,andChinasecondtolast,at160th.
34
For
whatit’sworth,theUnitedStatesisnoepitome:itranks28th.
BlockingWebsiteswithoutacourtorderhasbecomecustomaryinsuch
countries,andmanycensorshavefiguredouthowtothwartvirtualprivate
networksoftwareusedtopreventcensorship.
35
AccordingtoReportersWithout
Borders,Russiahasbeencurtailingfreedomsofexpressionandinformationand
blockingincreasinglymoresitessinceVladimirPutin’sreturntothepresidency
in2012,amongthemWikipedia.
36
Chinahasmasteredtheartofthetargeted
datablackout,censoringsearchtermsrelatedtoHongKong’s“OccupyCentral”
prodemocracymovementandthetwenty-fifthanniversaryoftheTiananmen
SquareprotestsonWeibo,China’sTwitterclone.Itmanagedtoblocknearly90
percentofallGoogleservices.Imprisonmentisalsopopularinthesecountries
whenpeoplepostcontentdeemedquestionablebythegovernmentonline.
FollowingtheChinesestockmarketcollapseinJuly2015,authoritiesarrested
morethanonehundredpeopleforusingsocialmediatospreadrumorsthat
“causedpanic,misledthepublicandresultedindisordersinstockmarketor
society.”
37
Governmentsthatwishtorepressthevoicesofcitizenseverywhereandhave
capturedtechnologiesliketheInternettosilencedissidentsandblockoutside
mediawillfindblockchaintechnologysignificantlymorechallengingforseveral
reasons.First,citizensandjournalistscouldusepublickeyinfrastructureto
encryptinformationandconcealtheiridentitiesfromwould-becensorsand
attackers.Second,wheregovernmentsdiscourageanddeprivegoodandhonest
journalismoffunding,journalistscouldraisefundsontheblockchain,castinga
widernetforinvestorssympathetictotheircause,especiallyinvestorswho
preferredtoremainanonymous.Finally,governmentscouldnotdestroyoralter
informationrecordedontheblockchain;therefore,wecoulduseittohold
governmentsandotherpowerfulinstitutionsaccountablefortheiractions.
Considercrowdfundingjournalistsontheblockchain.Ifwereleasedthem
fromthefinancialgripofstate-controlledmedia,theycouldcoverpoliticsfreely
whilepreservingtheanonymityofdonors.VeteranChinesejournalistscouldtry
oneofthedistributedpeer-to-peercrowdfundingplatformssuchasKoinify,
Lighthouse,orSwarmthatusePKItoprotecttheidentitiesofsenderand
recipientbetterthanInternet-onlysystems.Anothergreatblockchaintoolisthe
freemobileappGetGems,whichbothguardsandmonetizesinstantmessaging
throughbitcoin.Userscansendallsortsoffilessecurely,withGetGems
functioninglikeprivatee-mail,notjustSMS.
38
Theseappsarejustthe
beginningofwhatispossible.
Anothersolutionisadistributedplatformforfilingstoriesinanimmutable
ledgerthatmakestheledgerunique,suchaswhatFactomaimstoaccomplishin
thedevelopingworld.Reporterscouldpurchaseentrycredits—rightstocreate
entriesonFactom’sledger.Aswiththebitcoinledger,everyonewouldgetthe
samecopy,andanyonecouldaddtoitbutnoonecouldalterentriesoncethey
werefiled.Factomhasacommit/revealcommitmentschemethatservesasan
anticensorshipmechanism:serversinChina,forexample,couldn’tpreventthe
filingofanotherwisevalidentrybecauseofitscontent.Ifthereporterhad
attachedanentrycredittothefiling,thenitwouldgetrecorded.Agovernment
couldidentifycertainentriesasoffensivebutcouldn’tdeleteorblockthemas
theChinesegovernmenthasdoneonWikipedia.Ifanofficialcourtweretoorder
achangeintheledger,anofficerofthecourtcouldmakeanewentrytoreflect
theruling,butthehistorywouldremainforalltosee.
39
Athirdsolutionisdistributedpeer-to-peermicrobloggingthatdoesn’tgo
throughcentralizedservers.StephenPair,CEOofBitPay,describedhowto
reinventTwitterorFacebooksothatuserscontrolledtheirowndata.“Insteadof
havingjustonecompanylikeFacebook,youmighthavemanycompaniestying
intothiscommondatabase[theblockchain]andparticipatinginbuildingtheir
ownuniqueuserexperiences.Someofthosecompaniesmightaskyouforor
mightrequirecertaininformationtobesharedwiththemsothattheycould
monetizethat.Butasauser,youwouldhavefullcontroloverwhatinformation
you’resharingwiththatcompany.”
40
ThereisTwister,aTwittercloneinterms
offeelandfunctionalitydevelopedin2013byMiguelFreitas,ahackerand
researchengineeratPUC-RioUniversityinRiodeJaneiro,Brazil.Twister
leveragesthefreesoftwareimplementationsofbitcoinandBitTorrentprotocols
anddeployscryptographyendtoendsothatnogovernmentcanspyonusers’
communications.
41
GETTINGTHEWORDOUT:THECRITICALROLEOFEDUCATION
JoichiItoisamonganelitegroupofwidelysuccessfulentrepreneurs—fromBill
GatesandSteveJobstoBizStoneandMarkZuckerberg—whodroppedoutof
collegetoinventsomethingnewinthedigitaleconomy.
42
Itisahallmarkofour
entrepreneurialculturethatone’spursuitofanidea,togodeepandunderstand
itsnuancesasItolikestosay,drivesavisionaryoutoftheclassroomandinto
business.HenryFordandWaltDisneypursuedtheirpassionswithoutcollege
degrees.AndsoitisoneofthoseparadoxesthattheMassachusettsInstituteof
TechnologywouldchooseItotodirectitslegendaryMediaLab,attheepicenter
ofallthingsdigitalandrelevanttoculture.
Thetimingwasperfect.“DigitalcurrencyissomethingthatI’vebeen
interestedinevenbeforetheMediaLab....Iranoneofthereallyearlydigital
testserversfromtheDigiCashdaysinthe1990s.OneofthefirstbooksIever
wrotewasinJapanese,calledDigitalCash,thatIcoauthoredwithsomeonefrom
theBankofJapan.Sothishasbeenanareaofinterestformeforalongtimeand
predatesalotoftheotherstuffI’vebeendoing.”
43
WhenhegottotheMediaLab,variousacademicsweredabblinginsome
aspectofbitcoinrelativetotheircorediscipline—consensusmodels,
cryptography,computersecurity,distributedsystems,andeconomics—butno
onespecificallyfocusedonit.Hedidn’tseefacultydoingfundamentalresearch
aroundbitcoin,eventhoughMITstudentshadlaunchedtheMITBitcoinProject
togive$100ofbitcointoundergraduates.
ItohadasenseofurgencysimilartoImogenHeap’sinspreadingtheword
andformingteamsaroundlegal,technical,andcreativechallenges.Blockchain
technologiesweremovingmuchfasterthanInternettechnologieshad,but
withoutmuchacademicinvolvement.Thecoredevelopersofthebitcoin
protocolswererecoveringfromreputationalhits:theBitcoinFoundationwas
bankrupt,andboardmemberMarkKarpeleswasarrestedinJapanfor
embezzlementthroughhisMt.Goxexchange.Itomovedquickly.Helaunched
theDigitalCurrencyInitiative(DCI)attheMediaLabandhiredformerWhite
HouseadviserBrianFordetodirectit.Hebroughtthreeofthebitcoincore
developersintotheDCItoprovidethemwithstabilityandresourcessothey
couldfocusonthecode.
Hethoughtthatcreatinganacademicnetworkofuniversitiesinterestedin
supportingbitcoinwasimportant,andthat’sunderway.“We’resettingup
courses,we’retryingtoorganizeresearch,butwe’restillveryearly-stage,”he
said.“We’vejustgotthecorefundingtogethertosupporttheprogram,and
we’rejusttryingtodrumupinterestfromthefacultyandthestudentsinthe
space.”Morebroadly,hewantstheMITMediaLabtoreinventhighereducation
sothatpeoplelikehimwon’tdropoutandwillseethevalueofadiverseplace
liketheLab.It’sanopportunitytopilotthefutureofacademia.
44
MelanieSwan,aleadingblockchaintheoristandacademic,wasmore
specificaboutwheretoeducatestudentsabouttheblockchain,andit’snotin
traditionaluniversities.It’sontheblockchain.“It’sreallyacompleterevolution
inhowwedoeverything.Academiaisnottherightplacetodoacademic
thinkingaboutverynewthingsliketheblockchain,”shesaid.Forexample,
ratherthansubmittingresearchtoscholarlyjournalsforpublicationandwaiting
fromsixtoeighteenmonthsforarejectionorpublication,ascholarcouldpost
thepaperimmediatelyasSatoshiNakamotodidtoalimitedaudienceofpeers,
receivereviewsinrealtime,andestablishtheneededcredibilitytopublishtoa
largeraudience.Reviewerscouldvotereviewsupordownasredditorsdoon
Redditsothatthescholarwouldknowwhichonestotaketoheart.Thepaper
mightevenbeavailableforfree,butotherscientistscouldsubscribetodeeper
analysisorthreadeddiscussionwiththeauthor.Thescholarcouldmakeherraw
dataavailableorshareitwithotherscientistsaspartofasmartcontract.Ifthere
wasacommercialopportunityflowingfromthepaper,shecouldprotectthe
rightsinadvance,takingintoconsiderationwhofundedtheresearchandany
claimstheymightmaketothediscovery.
SwanisthefounderoftheInstituteforBlockchainStudies.“There’sthestart
ofadevelopmentofaneducationalinfrastructuretosupportlearningaboutthese
technologies.Obviously,allthemeetups,usergroups,andhackathonsare
tremendouslyuseful,”shesaid.“Everystrategyandaccountingconsultancyhas
ablockchainpracticegroupnow,andthereareeducationinstitutionslike
BlockchainUniversity.”
45
Swanherselfteachesablockchainworkshopat
SingularityUniversity.
Shetalkedofaneducationsystemwhereacollegestudentwouldbecome
whatshecalledan“educationalsommelier,”pairinginterestsorneededskills
withaccreditedcourses,potentiallymassiveopenonlinecourses(MOOCs).
“ThebenefitofMOOCisdecentralizededucation.SoIcantakethetopmachine
learningclassfromAndrewNgatStanfordUniversityviaCoursera.Icantake
thetopothercoursesatMIT.”Sostudentscouldfundtheirownpersonal
developmentprogramsanywhereintheworldandreceiveaccreditation.She
explained:“JustaswhenIgotaketheGREortheGMATortheLSAT,Ishow
upwithmyID,itconfirmslocallythatIamwhoIsayIam,Itakethattest,”and
thatlocalconfirmation“couldeasilybepartoftheMOOCinfrastructure.”
SwanhasbeenworkingonhowtodoMOOCaccreditationandtackle
studentdebtontheblockchain.Theblockchainprovidesthreeelementstoward
thisgoal:(1)atrustableproofoftruthmechanism,anoracle,toconfirmthatthe
studentswhosignedupfortheCourseraclassesactuallycompletedthem,took
thetests,andmasteredthematerial;(2)apaymentmechanism;and(3)smart
contractsthatcouldconstitutelearningplans.Considersmartcontractsfor
literacy.“Whydon’twetargetfinancialaidtowardpersonaldevelopment?Like
Kiva,butKivaforliteracy,”Swansaid,exceptthateverythingwouldbesuper
transparentandparticipantswouldbeaccountable.Donorscouldsponsor
individualchildren,putmoneytowardlearninggoals,andpayoutaccordingto
achievement.“SayIwantedtofundaschoolchildinKenya’sliteracyprogram.
Everyweekthischildwouldneedtoprovideproofofcompletionofareading
module.Perhapsit’sallautomatedthroughanonlinetestwheretheblockchain
confirmedthechild’sidentityandrecordedprogressbeforedisbursingthenext
week’sworthoffundingintowhatwemightcallthechild’s‘smartwalletfor
learning’sothatthechildcouldcontinuepaymentforschoolwithout
interference.Moneytowardagirl’seducationcouldn’tbedivertedtoher
brothersschooling,”shesaid.
46
CULTUREONTHEBLOCKCHAINANDYOU
Aftertwoworldwarsinasinglegeneration,globalleadersadmittedthat
politicalandeconomicagreementscouldnot—wouldnever—maintainlong-
termworldpeace.Thoseconditionschanged,sometimesfrequently,sometimes
drasticallyso.Peacehadtoberootedinsomethingricher,moreuniversal,inthe
sharedmoralvaluesandintellectualfreedomsofsociety.In1945,threedozen
nationsconvenedtoformaneducationalbodyofsortsthatwouldmodela
cultureofpeace.ItbecameknownastheUNEducational,Scientific,and
CulturalOrganization(UNESCO).Itsmissionintheworldtodayis“tocreate
theconditionsfordialogueamongcivilizations,cultures,andpeoples.”
47
Throughthelensofblockchaintechnologies,musicians,artists,journalists,
andeducatorsareseeingthecontoursofaworldthatprotects,cherishes,and
rewardstheireffortsfairly.Allofusshouldcare.Weareaspeciesthatsurvives
byitsideas,notbyitsinstincts.Weallbenefitwhencreativeindustriesthrive
andwhenthecreativesthemselvescanmakealiving.Moreover,thesearethe
bellwethersofoureconomy—theyrevealfasterthannearlyanyotherindustry
howbothproducersandconsumerswilladoptandthenadaptatechnologyto
theirlives.Musicianshavelongbeenamongthefirsttoexploitinnovationsfor
thebenefitofagreatmanyothers,toooftenattheirownexpense.These
dedicatedmembersofoursocietyinspireus,andeverybusinessexecutive,
governmentofficial,andotherorganizationalleaderhasmuchtolearnfrom
themabouttheneweraofthedigitalage.
PARTIII
PROMISEANDPERIL
L
CHAPTER10
OVERCOMINGSHOWSTOPPERS:
TENIMPLEMENTATIONCHALLENGES
evSergeyevichTermenwasagiftedmusician,buthepreferredplayingwith
physics.BornintoRussianaristocracybeforetheturnofthetwentieth
century,TermenjoinedtheBolsheviksindismantlingthetsaristautocracy.One
ofhisearlymissionswastocreateadevicethatcouldmeasuretheelectrical
conductivityandcapacityofvariousgases.Hetriedgas-filledlamps,hetrieda
high-frequencyoscillator,andheeventriedhypnosis.
1
Theoscillatorendedup
workingwell,andsoTermen’sbossencouragedhimtoseekotherapplications
forit.Twoappswouldbecomelegendary.Themorewhimsicalofthetwostarted
outastwometalterminalswithnothingbetweenthem,likealampwithoutthe
glass.Termendiscoveredthat,ifheinfusedthisvoidwithgas,hecouldgauge
thegas’selectricalproperties.Hisdesignwasbrilliant:hesubstituted
headphonesfordialssothathecouldtakeacousticratherthanvisualreadings,
monitoringthepitchofthesignalthateachgasproduced.Itwaswayaheadofits
time,thestuffofDr.EmmettBrown’sgarageinBacktotheFuture.
DevoteesofTEDtalksandstudentsoftechnologicalhistoryalreadyknow
theendofthisstory:Termenstumbleduponameansofmakingmusicoutof
thinair.Wheneverheputhishandsnearthemetalterminals,thepitchofthe
signalchanged.Helearnedthathecouldmanipulatethepitchbytheprecise
positionandmotionofhishands.Hecalledhisdevicethe“etherphone,”known
todayasthetheremin,ananglicizedversionofhisname.Theotherappwasa
larger-scaleversionofthisapparatus,onethatwassensitivetomovementwithin
aradiusofseveralmeters.Itwasthefirstmotiondetector—sentryoftheether.
HedemonstratedbothoftheseinstrumentsattheKremlin,playinghis
etherphonewithabandonforComradeLenin.WhileLenindelightedinthe
etherphone,heputthemotiondetectorimmediatelytoworkinwatchingoverthe
Sovietstashesofgold.Ifanyonecrossedtheelectromagneticlinearoundthe
gold,they’dsetoffasilentalarm.BigBrothersuddenlyhadelectriceyes.
Themoralofthestoryissimple:Termen’sdevicesbroughtbothlightand
darknesstotheworld.Inapoignanttalk,“OurComradetheElectron,”Maciej
CeglowskipointedoutthesetwothemesinallofTermen’sinventions:assoonas
theygaveshapetoairynothing,theywereusurpedbydarkforces.Lenineven
co-optedelectricityinhispropaganda,equatingcommunismwithSovietpower
plustheelectrificationofthecountry.
2
ButitwasStalinwhoroundedupTermen
andhispeers,threwthemintotheKolymagulag,andforcedthemtoinvent
instrumentsoftyranny.
We’veheardbitcoinusedwithsimilargrandiosityincampaignsofall
stripes.Likeeveryrevolutionarytechnology,thebitcoinblockchainhasits
upsideanditsdownside.Inthepreviouschapters,we’vewalkedyouthroughthe
manypromisesofthistechnology.Thischaptershinesaspotlightonten
showstoppers—problemsandperils.Forgiveusifsomeofthesearetechnically
complicated.Wethinkitimprudenttosupersimplifytheseissues:weneeda
certainlevelofdetailforprecision.
Aswell,afterreadingthissectionyoumaybetemptedtodismissthese
blockchaininnovatorsbecausetheyfaceseriousobstacles.Weencourageyouto
considerwhethertheseareeither“reasonstheblockchainisabadidea”or
“implementationchallengestoovercome.”Wethinkit’sthelatter,andwe’dlike
innovatorstoviewtheseasimportantproblemstosolvecreativelyaswe
transitiontotheseconderaoftheInternet.Foreachchallenge,weproposesome
solutions.Inthefinalchapter,wepresentourthinkingonwhatwecandooverall
toensurethefulfillmentoftheblockchain’spromise.
1.THETECHNOLOGYISNOTREADYFORPRIMETIME
Asofthiswriting,mostpeoplehaveonlyavagueunderstandingofbitcointhe
cryptocurrency,andveryfewhaveheardofblockchainthetechnology.Youthe
readerareamongtheforward-thinkingfew.Bitcoinconjuresimagesranging
fromapyramidschemeandamoneyLaundromattoafinancialE-ZPassonthe
economichighwayforvalue.Eitherway,theinfrastructureisn’treadyforprime
time,sogoestheargument.
Thechallengeismultifaceted.Thefirstfacetborrowsfromsciencefiction
authorWilliamGibson,thatthefutureishere;itsinfrastructureisjustunevenly
distributed.HadGreekcitizensknownaboutbitcoinduringtheircountry’s
economiccrashin2015,theystillwould’vebeenhard-pressedtolocateabitcoin
exchangeorabitcoinATManywhereinAthens.Theywouldn’thavebeenable
totransfertheirdrachmasintobitcoinstohedgeagainsttheplummetingfiat
currency.ComputerscientistNickSzaboandinformationsecurityexpert
AndreasAntonopoulosbotharguedthatrobustinfrastructuremattersandcan’t
bebootstrappedduringcatastrophes.AntonopoulossaidthatGreece’s
blockchaininfrastructurewaslackingatthetimeofthecrisis,andtherewas
insufficientbitcoinliquidityforanentirepopulationtomoveitstroubledfiat
currencyintoit.
Ontheotherhand,thebitcoinblockchainisn’treadyforGreeceeither.
That’sthesecondfacet:itfallsshortonsecuritycontrolsforsuchamassive
bumpinusage.“Thesystemlacksthetransactionalcapacitytoon-boardten
millionpeople.Thatwouldrepresentalmostatenfoldincreaseinuserbase
overnight,”saidAntonopoulos.“RememberwhathappenedwhenAOLdumped
2.3millione-mailaccountsontotheInternet?Wequicklydiscoveredthatthe
Internetwasn’tready,intermsofspamprotectionandNetetiquette,toabsorb
2.3millionnoobswhodidn’thavetheculture.That’snotgoodforanimmature
technology.”
3
Theblockchainwouldbesusceptibletocapacityproblems,system
failures,unanticipatedbugs,andperhapsmostdamaging,thehuge
disappointmentoftechnicallyunsophisticatedusers,noneofwhichitneedsat
themoment.
Thatrelatestothethirdfacetofthisshowstopper,itsinaccessibilitytothe
averageperson.There’snotenoughwalletsupport,andmanyinterfacesareuser-
unfriendly,requiringahightoleranceforalphanumericcodeandgeekspeak.
Mostbitcoinaddressesaresimplystringsofbetweentwenty-sixandthirty-five
charactersbeginningwithaoneorathree,quitetedioustotype.AsTyler
Winklevosssaid,“WhenyougotoGoogle.comyoudon’ttypeinastringof
numbers.Youdon’ttypeinanIPaddress.Youtypeinaname,awordthatyou
canremember.Andthesamegoeswiththebitcoinaddresses.Bitcoinaddresses
shouldn’tbeexposedtotheaverageuser.Littlethingslikethatmakea
difference.”
4
Sothere’smuchworktobedoneinbasicuserinterfaceand
experience.
Criticshavealsoraisedconcernsaboutlong-termilliquiditybecausebitcoin
isfiniteinquantity—21millionby2140—andminedatadiminishingrate.Itsa
rules-basedmonetarypolicyintendedtopreventinflationtriggeredbyarbitrary
anddiscretionarymonetarypolicies,aphenomenoncommonplaceformanyfiat
currencies.Satoshiwrote,“It’smoretypicalofapreciousmetal.Insteadofthe
supplychangingtokeepthevaluethesame,thesupplyispredeterminedandthe
valuechanges.Asthenumberofusersgrows,thevaluepercoinincreases.Ithas
thepotentialforapositivefeedbackloop;asusersincrease,thevaluegoesup,
whichcouldattractmoreuserstotakeadvantageoftheincreasingvalue.”
5
Atthemargin,coinsstoredinlostwalletsorsenttoaddresseswhoseowners
havelosttheirprivatekeysarenotrecoverable;theyjustsitdormantonthe
blockchain,andsotherewillbefewerthan21millionincirculation.Early
adoptershavetendedtoholdontobitcoinastheyholdontogold,hopingthatits
valuewillincreaseinthelongrun,andthereforetreatingbitcoinasanasset
ratherthanasamediumofexchange.Accordingtoeconomictheorists,lowor
noinflationmotivatesholderstohoardratherthanspendtheirbitcoin.Still,if
moretrustedbitcoinexchangesfacilitateconsumers’movementinandoutof
bitcoin,thenthefrequencyandvolumeoftradingcouldincrease.Ifmore
merchantsacceptbitcoinasamediumofpayment,thenpeoplewho’vebeen
sittingonbitcoinsmaystarttousetheirstoreforpurchases,therebyfreeingup
morebitcoins.Ifmerchantsbegintoissuebitcoin-denominatedgiftcards,then
morepeopleshouldbeexposedtocryptocurrenciesandbecomemore
comfortabletransactinginbitcoin.Andso,hypothetically,peoplewillhave
fewerreasonstohoardbitcoin.Advocatesofthebitcoinprotocolarguethat,
becausebitcoinsaredivisibletoeightdecimalplaces—thesmallestunitiscalled
aSatoshi,worthonehundredthofamillionthofabitcoin—thesmallest
denominationswillbuymoreifdemandforbitcoinincreases.There’salsothe
possibilityoftweakingtheprotocolstoallowforgreaterdivisibility,say,
picopayments(trillionthsofabitcoin)andtoreminestrandedbitcoinaftera
periodofdormancy.
Afifthdimensionishighlatency:forthebitcoinblockchainnetwork,the
processofclearingandsettlingtransactionstakesabouttenminutes,whichisfar
fasterendtoendthanmostpaymentmechanisms.Butclearingtransactionsat
thepointofsaleinstantaneouslyisnottheissue;therealproblemisthatten
minutesissimplytoolongfortheInternetofThingswheredevicesneedto
interactcontinuously.CoredeveloperGavinAndresensaidsolvingforatrillion
connectedobjectsis“adifferentdesignspacefrombitcoin,”aspacewherelow
latencyismorecriticalandfraudislessofanissueorwherepartiescould
establishanacceptableleveloftrustwithoutthebitcoinnetwork.Tenminutesis
alsotoolongforfinancialtransactionswheretimingmatterstogetanassetata
particularprice,andwherelatencyexposestraderstotime-basedarbitrage
weaknessessuchasmarkettimingattacks.
6
Theimmediatesolutionfor
entrepreneurshasbeentoforkthebitcoincodebase,thatis,tomodifythesource
codebytweakingafewparameters,andtolaunchanewblockchainwithan
altcoininplaceofbitcoinasincentivetoparticipate.Litecoinisapopularaltcoin
withablocktimeof2.5minutes,andRippleandEthereumareentirely
reengineeredblockchainplatformsthathavelatencyofseconds,notminutes.
AsixthdimensionisbehavioralchangeinadeepersensethanNetiquette.
Today,manypeoplecountontheirbankorcreditcardcompany,eventalking
witharealperson,whentheymakeanaccountingerror,forgettheirpasswords,
orlosetheirwalletsorcheckbooks.Mostpeoplewithbankaccountsaren’tinthe
habitofbackinguptheirmoneyonaflashdriveoraseconddevice,securing
theirpasswordssothattheyneedn’trelyonaserviceproviderspasswordreset
function,orkeepingthesebackupsinseparatelocationssothat,iftheylosetheir
computerandallotherpossessionsinahousefire,theydon’tlosetheirmoney.
Withoutthisdiscipline,theymightaswellstufftheirmattresswithcash.With
greaterfreedom—betterprivacy,strongersecurity,andautonomyfromthird-
partycoststructuresandsystemfailures—comesgreaterresponsibility.Forthose
consumerswhodon’ttrustthemselvestokeepsafebackupsoftheirprivatekeys,
third-partystorageproviderscouldprovidebackupservice.
Aseventhdimensionissocietalchange.Moneyisstillasocialconstruct
representingwhatasocietyvalues.Itisendogenoustothatsociety,itmanifests
becauseofhumanrelationships,anditadaptstoevolvinghumanneeds.“You
can’ttakethesocialoutofmoney,”saidIzabellaKaminskaoftheFinancial
Times.“Alotoftheseprotocolsattempttodothatbycreatinganabsolutistand
veryobjectifiedsystem.Itjustdoesn’treflecttheworldasitis.”Shepointedto
theeurosystemasanexampleofhowonesize—onesetofprotocols—doesn’t
fitallcountries.
7
SheechoedwhatAntonopoulossaidabouttheveryhuman
needforsocietiestoforgiveandforgetinordertomoveon.“There’saverylong
traditioninfinanceofobliteratingrecords,becauseweasasocietybelievethat
it’swrongtopersecuteordiscriminateagainstindividualsforsomethingtheydid
tenorfifteenyearsago.Wehavethiswholedebtjubilee-esquementality
becausewethinkpeopleshouldbegivenanotherchance.Creatingasystemthat
neverforgetsisslightlysociopathic,”shesaid.
8
Thatleadsustotheeighthdimension,thelackoflegalrecourseinaworld
ofirrevocabletransactionsandunvoidablesmartcontracts.Accordingtolegal
scholarsPrimaveraDeFilippiandAaronWright,“Peopleare,indeed,freeto
decidetheparticularsetofrulestowhichtheywanttoabide,but—afterthe
choicehasbeenmade—cannolongerdeviatefromtheserules,totheextentthat
smartcontractsareautomaticallyenforcedbytheunderlyingcodeofthe
technology,regardlessofthewilloftheparties.”
9
Thisveryhighdegreeof
certainty—mathematicalcertainty—astotheoutcomeofatransactionorasmart
contractisunprecedentedinsociety.Itdeliversgreaterefficienciesand
effectivelyeliminatesnonperformanceriskbecausewehavenochoiceofbreach,
nochoiceofdamages.Butthat’salsoadownside.Itallowsnoroomforhuman
beings.ToJoshFairfieldofWashingtonandLeeUniversitySchoolofLaw,that
means“moremessiness,notless.We’regoingtoseemorefights.‘Youdidn’t
actuallyrenovatemyhouse,Iwantmymoneyback.’We’regoingtoseemore
humanmessiness,butmorehumanmessinessdoesn’tmeanthetechnologyis
bad.”
10
Butwillpeopleactuallytakethecounterpartytocourt?DeFilippiestimated
that,intheanalogworld,80percentofcontractbreachesaren’tenforcedbecause
they’retoocostlytopursueincourt,tooexpensivetogointoproceedings.Why
shouldthosenumbersimproveinablockchainworld?Whenthecodeindicates
thatthecontracthasbeenfullyexecutedratherthanbreached,exceptoneparty
isdissatisfiedwiththeoutcome,willthedissatisfiedpartyactuallypursuea
lawsuit?Willthecourtsrecognizethecase?Willthesmallbusinessownerback
awayfromthecorporatelegalteamofDewey,Cheatham,andHoweor—with
hismodestresources—evenbeabletoidentifyhisanonymouscounterparty,so
thathecouldfilealawsuitinthefirstplace?
2.THEENERGYCONSUMEDISUNSUSTAINABLE
Intheseprimordialdaysofthebitcoinblockchain,theproof-of-workmethod
describedinchapter2hasbeencriticaltobuildingpeople’strust.Yearsfrom
now,wewilllookbackandappreciatethegeniusofitsdeployment,from
mintingandallocatingnewbitcoinstoassigningidentityandpreventingdouble
spending.Prettyremarkable.Andprettyunsustainable,accordingtocriticsof
cryptocurrenciesthatuseproofofworktokeepthenetworksafeand
pseudonymous.
Hashing,theprocessofrunningpendingtransactionsthroughthesecure
hashalgorithm256(SHA-256)tovalidatethemandsolveablock,burnsalotof
electricity.Somepeopleintheblockchainecosystemaremakingback-of-the-
envelopecalculationsthatbecomememesinthecommunity.Estimateslikenthe
bitcoinnetwork’senergyconsumptiontothepowerusedbynearlyseven
hundredaverageAmericanhomesatthelowendofthespectrumandtothe
energyconsumedbytheislandofCyprusatthehighend.
11
That’smorethan
4.409billionkilowatt-hours,
12
aGodzilla-sizedcarbonfootprint,andit’sby
design.It’swhatsecuresthenetworkandkeepsnodeshonest.
Inearly2015,TheNewRepublicreportedthatthecombinedprocessing
powerofthebitcoinnetworkwashundredsoftimesgreaterthantheaggregate
outputoftheworld’stopfivehundredsupercomputers.“Processingand
protectingthemorethan$3billionworthofbitcoinsincirculationrequiresmore
than$100millioninelectricityeachyear,generatingavolumeofcarbon
emissionstomatch.”Thearticle’sauthor,NathanSchneider,wrotewhathas
beenonourmindseversince:“Allthatcomputingpower,whichcouldbecuring
cancerorexploringthestars,islockedupinmachinesthatdonothingbut
processbitcoin-typetransactions.”
13
Ascitizenswhocareaboutourplanet,weshouldallbeconcerned.Thereare
twoissues,onearoundtheelectricityusedtorunthemachinesandanother
aroundtheenergyusedtocoolthemsothattheydon’tfail.Here’saruleof
thumb:foreverydollaracomputerburnsupinelectricity,itneedsfiftycentsto
cooldown.
14
TheacutedroughtinCaliforniahasraisedseriousconcernsover
usingpreciouswatertocooldatacentersandbitcoinminingoperations.
Asthevalueofbitcoinincreases,thecompetitionforminingnewbitcoin
increases.Asmorecomputingpowerisdirectedatmining,thecomputational
problemthatminersneedtosolvebecomesmoredifficult.Onemeasureofthe
totalprocessingpowerofthebitcoinnetworkisthehashrate.GavinAndresen
explains:“Let’ssaywehavemillionsoftransactionsperblock,eachpayingan
averageofadollartransactionfee.Minerswouldbepaidmillionsofdollarsper
block,andtheywouldspendalittlelessthanthatinelectricitytodothatwork.
That’showtheproof-of-workeconomicsworkout.Itreallyisthepriceof
bitcoinandhowevermuchrewardisinablockthatdriveshowmuchhashingis
done.”
15
Thehashratehasbeenincreasingconsiderablyoverthelasttwoyears,
risingforty-five-foldinlessthanayear.Andthetrendistowardusingmore
energy,notless.
“Thecostforhavingnocentralauthorityisthecostofthatenergy,”saidEric
Jennings,CEOofFilament,anindustrialwirelesssensornetwork.
16
That’sone
sideoftheargument.Theenergyiswhatitis,andit’scomparabletothecost
incurredinsecuringfiatcurrency.“Allformsofmoneyhavearelationshipto
energy,”saidStephenPairofBitPay.Herevisitedthegoldanalogy.“Goldatoms
arerareonearthbecauseanintenseamountofenergyisneededtoformthem.”
Goldispreciousbecauseofitsphysicalproperties,andthosepropertiesderive
fromenergy.Pairmusedthatartificiallymanufacturinggoldwouldrequire
nuclearfusion.
17
Fromoneperspective,allthiselectricityconsumptionmakessense.Erik
Voorhees,founderofthecoinexchangeShapeShift,saidcriticswereunfairin
callingtheenergyspentonbitcoinminingawaste.“Theelectricityisbeing
burnedforapurpose.Thereisarealservicebeingprovided,thesecuringof
thesepayments.”Heurgedcriticstocompareitwiththeenergyburnedbythe
currentfinancialsystem.Thinkofthebigvaults,thebunkerlikearchitecturewith
majesticGrecianfacades,HVACsystemspushingfrigidairintobrightlobbies,
competingbranchesoneverycorner,andATMsinbetween.“Thenexttimeyou
seeaBrink’sarmoredtruckpumpingblacksootintotheair,comparethattothe
burningofelectricityinbitcoining.Itisnotquiteclearwhichisworse,”
Voorheessaid.
18
Thesecondenergy-relatedissueiscomputerarchitectureitself.For
backwardcompatibilitywithslower-changinglegacysystems,yourlaptoporPC
islikelyatypeofcomplexinstructionsetcomputer(CISC)thatcanrunawide
rangeofmathappsthattheaveragepersonwillnevereveruse.Whenengineers
realizedthatthey’dseriouslyovershotthemarket,theycreatedthereduced
instructionsetcomputer(RISC).YourmobiledeviceislikelyanadvancedRISC
machine(ARM).Whatminersrealizedwasthattheycouldalsoharnesstheir
graphicsprocessingunittoincreaseprocessingspeed.BecausemodernGPUs
havethousandsofcomputingcoresoneachchip,theyareidealforcomputations
thatcanbedoneinparallel,suchasthehashingdoneinbitcoinmining,There
weresometrade-offs,andestimatingthemachine’senergyconsumptiongot
slightlymorecomplicated,butforthemostpartGPUscoulddothework.
19
“IfIcandesignaRISCcomputertobeoh-so-superfastandmassively,near
insanelyparalleltotrythebillionsofkazillionsofcodessimultaneouslywith
littleornoelectricity,Iwillmakemoneyoutofthinair,”
20
saidBobTapscott,
Don’sCIObrother.That’swhattheBitFuryGrouphasdone:builtamassively
parallelbitcoinsolverwithapplicationspecificintegratedcircuits(ASICs)that
areenergyefficientanddesignedsolelytominebitcoins.ItsfounderandCEO,
ValeryVavilov,arguedtheviewthatmachinesandminingoperationsoverall
willcontinuetogetmoreenergyefficientandenvironmentallyfriendly.Someof
thatdependsonrelocatingtocoldclimateswhereenergyischeapandpreferably
renewable,suchashydroorgeothermal,andwhereeitherMotherNature
handlesthecoolingormanufacturersfigureoutanefficientwaytocapturethe
heat.BitFury,forexample,hastwodatacenters—oneinIcelandandanotherin
thecountryofGeorgia—withplansforadditionalcentersinNorthAmerica,and
itacquiredtheHongKong–basedstart-upAlliedControl,whichspecializesin
immersioncoolingtechnology.
21
AndsoBitFuryisworkingtoreducethe
ecologicalimpactofthebitcoininfrastructure.
Eveniftheseinitiativeslimitmining’scarbonfootprint,westillhavethe
rapidconsumptionanddisposalofthesecontinuallyupgradeddevices.Miners
whowanttomakeacareerofitmustcontinuallyupgradeandspecializetheir
systems.Mostminingequipmenthasausefullifespanofthreetosixmonths.
22
BobTapscottlikenedfirmssuchasBitFurytothoseYukonshopkeepersduring
thegreatgoldrush:theymadetheirrealfortunebysellingbetterandbetter
shovelstotheminers.
23
WefoundoneminersdescriptionofhisCointerra
TerraMinerIVbitcoinwithanASICchipthatwassoenergyintensivethathis
home’selectricalsystemcouldn’thandleit.“Iamsellingthreeunitsbecausemy
houseisoldandhassubstandardwiring.Idonotwantafire.”Thestartingbid
wasfivethousanddollars.
24
VendorssuchasMRIofAustraliaareapplyingnew
approachestorecycling,firstdisassemblingratherthanshreddingallthese
computingcomponents,andthenmanagingresultingwastestreams.Such
creativeprocessesareenablingthemtoreclaimpreciousmetalsandreuseupto
98percentofproductbyweight.
25
Unfortunately,hardwarerecyclingisstillnot
widelyavailabletomostconsumers.
Forbitcoin’scoredevelopers,theconcernislegitimateandworthsolving:
“Ifbitcoinreallydoesbecomeaglobalteamnetwork,Ithinkwewillneedto
slowlymoveawayfromproofofworkastheonlywayit’ssecure,”said
Andresen.“Intheverylongrun,maybewewillmoveawayfromproofofwork
asthewaythenetworkissecured,andwe’llcombineitwithsomethingelse.”
26
That’swhatseveralaltchainshavedone:exploredalternativeconsensus
algorithmssuchasproofofstakeforsecuringthenetworkwhileretaining
decentralization.Theopensourcenatureofthebitcoinprotocolmakesit
technicallyeasytodo.Remember,thepurposeofconsensusalgorithmsisto
distributetherighttodecidewhatthestateoftheblockchainistoadecentralized
setofusers.TothemindofVitalikButerin,thevisionarybehindEthereum,there
areonlythreesecurelydecentralizedsetsofusers,andeachsetcorrespondstoa
setofconsensusalgorithms:ownersofcomputingpower,withstandardproof-
of-workalgorithm;stakeholders,withvariousproof-of-stakealgorithmsin
walletsoftware;andmembersofasocialnetwork,witha“federatedstyle”
consensusalgorithm.
27
Notethatonlyoneofthoseconsensusmechanisms
includesthewordpower.Ethereumversion2.0willbebuiltonaproof-of-stake
model,whereasRippleusesafederatedmodel,asmallcontrolledgroupakinto
somethinglikeSWIFT,theglobalproviderofsecurefinancialmessaging,where
authorizedgroupsreachconsensusonthestateoftheblockchain.
28
Thosesystemsdon’tburnelectricityasthebitcoinblockchaindoes.Bram
Cohen,founderofTor,hasintroducedafourthwaytoaddresstheenergywaste,
whathecalls“proofofdisk,”whereownersofdiskstoragespace—peoplewho
havecommittedachunkofcomputermemorytomaintaininganetworkand
performingnetworkfunctions—definestheeconomicsetofusers.Ofthese
alternativestoproofofwork,Blockstream’sAustinHillcautionedagainstusing
alternativemethodsforsecuringconsensus.“Experimentationwithyourproof-
of-workalgorithmisdangerous,andit’sanewareaofcomputerscience.”
29
It
addsanadditionaldimensiontoinnovation:notonlymustdevelopersworry
aboutwhethertheirnewfeaturesandfunctionswillworkintheirownright,but
theymustalsocheckhowthechoiceofconsensusalgorithmkeepsthemsecure
anddistributedtothemostappropriateeconomicset.
Overall,theexpression“Ifthereisawill,thereisaway”applies.The
smartesttechnologistsontheplanetareworkingoncreativesolutionstothe
energyproblem,withmoreefficientdevicesanduseofrenewableenergy.
Further,ascomputersbecomeinexorablysmarter,theywillundoubtedlyprovide
theirownsolutions.BitcoinangelinvestorRogerVer,nicknamedBitcoinJesus,
said,“SaythesmartesthumanhasanIQupcloseto200.Imagineartificial
intelligenceswithanIQof250,orsay500,or5,000or5million.Therewillbe
solutions,ifwehumanswantthem.”
30
3.GOVERNMENTSWILLSTIFLEORTWISTIT
Tolibertariansandanarchists,SatoshiNakamotowrote,“Youwillnotfinda
solutiontopoliticalproblemsincryptography.”
31
Theywouldhavetolook
elsewhereforacure-alltobiggovernment.Satoshiviewedhisexperimentasa
gaininanewterritoryoffreedom,notatotalupheaval.Wheregovernmentshad
succeededinbeheadingcentrallycontrollednetworkslikeNapster,purepeer-to-
peernetworkslikeTorwereabletopersist.Couldthebitcoinblockchain
networkholditsownagainstmightycentralauthorities?
Thatmightbethebiggestunknown.Whatwilllegislators,regulators,and
adjudicatorsaroundtheworldmakeofblockchaintechnologies?“Thecourtsare
goingtogetitwrong.They’vealreadystartedtogetitwrong,applying
intellectualpropertyrulestoanythingthatisintangible.Theythinkthat
physicalityisthedividinglinebetweenvirtualpropertyandintellectualproperty,
andit’snot,”saidJoshFairfield.“There’snointellectualpropertyelement,
there’snopartofabitcointhatisintellectualproperty,there’snocreativespark
forcopyright,there’snopatentableidea,there’snopatent,there’sno
trademark.”
32
AccordingtoStephenPairofBitPay,“Thebiggestthreatto
bitcoinisthatitbecomessoheavilyregulatedatsomepointthatacompetitor
that’smoreprivateandmoreanonymousshowsupandeverybodyswitchesto
that.”
33
Onething’sforsure:“Whatevertheparticularpolicyissueis,ifyou
don’tunderstandthetechnologyandyoudon’tunderstandtheimplications,
you’resettingyourselfupforfailure,”saidJerryBritoofthebitcoinpolicythink
tankCoinCenter.“Ifyoudon’tunderstandit,youcanintroducelawandpolicy
that’sgoingtoharmthedevelopmentofthetechnology.Wejustwantyouto
understandwhatyou’redoing.”
34
Sotheirchallengeisformidable.Theymustoverseetheunforeseeable.On
theonehand,theymustavoidstiflinginnovationbyoverreactingtoworstcases
—humantrafficking,illicitdrugtrade,gunrunning,childpornography,terrorism,
taxevasion,andcounterfeiting,forinstance.Ontheotherhand,theymustnot
twistnewbutunprovenapplicationssuchasblockchain-basedplatformsfor
identitymanagementtorestrictcivilliberties.Theremustbeastableapproachto
regulation,legislation,andtheinternationalnegotiationoftreatiestominimize
regulatoryuncertainty,sothatinvestorswillcontinuetosupportthetechnology’s
globaldevelopment.
Jurisdictionalreadymatterswhenitcomestousingbitcoin.Some
governmentshavebanneditorbannedstatebanksfromexchangingit,asChina
hasdone.Britosaid,“InatypicallyChineseway,it’snotillegal,butitcouldbe
atanymomentandeverybodyknowsit.”
35
Chinaisallowingaserious
professionalminingcommunitytoflourishandthoseminingpoolshavebecome
quiteinfluentialindebatesoverupgradestothebitcoinprotocol.Whathappens
toblockchainsecurityifChinasuddenlybansmining,too?Otherjurisdictions
havemovedtodefinebitcoinnarrowly,astheU.S.InternalRevenueServicehas
done.TheIRShaslabeledbitcoinasanassetforcalculatingtaxesonthe
appreciationofvalue.
Legalframeworksalsomatter.LegalscholarsDeFilippiandWrightdon’t
thinkthecurrentonecanhandlethequestionsraisedbysmartpropertydeployed
globallyatscale.Smartcontractsbothdefineandmanageownershiprights.
Theircodemakesnoassumptionsabouttheassignmentofrights,andcodecan’t
arbitrarilyseize,divest,ortransfertheserights.Forexample,ifduringthe
processoflandregistration,governmentofficialsassignedtheownershipofa
parceloflandtosomeonewhoisn’tthelegalownerofthatparcel,thatperson
wouldhaveabsolutesovereigntyovertheparcel,andthelegalownercouldn’t
simplyreversetheassignment.
JoshFairfieldfocusesmoreonprocess:“Thecommonlawisn’taffecting
technologylaw;thecommonlawistechnologylaw.Thecommonlawisthe
processofadaptinghumansystemstotechnologicalchange...therealfightis
howdowetakeoldrulesmeantforoldtechnologyandadaptthemrapidlyand
competently,”sothattheyarerecognizablewhenwestartusingthembutiterated
sothatthey’restateoftheartwhenthetechnologyreallyhits.
36
Lastbutnotleast,andthisshouldbenosurprise,identitymattersbig-time—
oratleasthowweconstructitontheblockchainmatters.“Peoplehaveavery
simplisticviewofidentity,”saidAndreasAntonopoulos.“Iamactuallyterrified
oftheimplicationsofdigitalidentitybecauseIthinkpeoplewilltakeshortcuts..
..Ifwetransferidentitytothedigitalworldwhereviewsareinflexible,we
actuallyendupwithaconstructthatdoesnotresemblethesocialconstructof
identity,butisaterrifying,fascistcopyofit.”
37
Combineapreciselycodedversionofpersonhoodwithapreciselycoded
versionofsociety,andyougetthestuffofsciencefictionnovelsandArnold
Schwarzeneggermovies.LegalscholarsDeFilippiandWrightconjuredimages
of“self-enforcingcontracts,walledgardensortrustedsystems,ownedand
managedbyasophisticatednetworkofdecentralizedorganizationsthatdictate
whatpeoplecanorcannotdo,withoutanykindofconstitutionalsafeguardsor
constraints.”Inotherwords,amachine-driventotalitarianregime.
ArtificialintelligenceexpertSteveOmohundrothrewthisphraseatus:the
dictatorslearningcurve,orhowcavedwellersendupwithspaceage
technology.ThinkaboutalltheAIlabsouttherestaffedbytheworld’ssmartest
PhDswithaccesstotheworld’smostpowerfulcomputers.PhDsmightforkthe
bitcoincodeorwriteasmartcontractthatcontrolsadrone’sdeliveryofa
package,wherebitcoinisheldinescrowuntilthatexactmomentwhenthe
packagearrives.Let’ssaythesePhDspostthatsoftwareasopensourcecodeto
theInternet,becausethat’swhattheydotomovetheirideasforward;theyshare
ideas.SonowISISdoesn’tneedanAIlab,itdoesn’tneedasoftware
developmentteam.Itjustneedstosubstituteagrenadeforthepackage.That’s
thedictatorslearningcurve,andit’snotsteep.Butdon’tblamethecodeorthe
cultureofsharing.It’snotnecessarilywhatwedowiththecode;it’swhatwe
don’trealizewe’redoingwithit—theunintendedconsequencesofafriction-free
world.
4.POWERFULINCUMBENTSOFTHEOLDPARADIGMWILLUSURP
IT
ManyofourconcernsaboutthefirstgenerationoftheInternethavecometrue.
Powerfulcorporationshavecapturedmuchofthetechnologyandareusingitin
theirvastprivateempirestoextractmostofthevalue.Theyhaveclosedoff
opportunityandprivatizedmuchofourdigitalexperience.Weuseproprietary
storestoacquireandusenewappsonourphones,tablets,andnowwatches.
Searchenginesandmarketingdepartmentsalikeinterruptourcontentwith
advertising.Bigcompaniesthatpromoteandprosperfromconsumer
transparencyarenotoriouslysecretiveabouttheiractivities,plans,technology
infrastructures,andinformationassets.Tobesure,somecompanieshaveopened
upvoluntarily,butmanyothershavemerelyreactedtothesunlightof
whistleblowersandinvestigativejournalism.Suchdisclosuresaredwarfedby
effortstohideoperationsandconcealinformation.
Simplyput,theyhaven’tbeengoodstewardsofthepublictrust.
Caseinpoint:thebankingindustry.“Banksaretraditionallysecretkeepers,”
accordingtoKaminskaoftheFinancialTimes.Sheexplainedthatbanksmake
goodjudgmentsaboutwhomtolendtoandhowtoprocesspaymentswhenthey
havegoodaccesstoprivateinformation,andtheygetthatinformationby
promisingtokeepthesecret.Themoresecretstheyhold,thegreaterthe
informationasymmetryandthegreatertheiradvantages,butthoseadvantages
haveharmfulsystemicimplications.
38
Sowhat’stopreventhugecorporationsor
powerfulnation-statesfromcapturingblockchaintechnologiesfortheirown
narrowinterests?“Anyconsensusmechanismthatyouhaveisgoingtobe
susceptibletomarketing—wherepowerfulinterestsspendmoneytryingto
convincepeopletodoacertainthing,”saidPairofBitPay.
39
Tobeclear,wearenotsuggestingthatcorporationsandgovernmentsshould
leavethistechnologyalone.Afterall,blockchaintechnologyisemergingasan
importantglobalresourcethatcouldenablenewcapabilities.Moreover,society
needsgovernmentstodeliverservicesfortheircitizenryandcorporationsto
createjobsandwealth.Butthat’sdifferentfromcapturingadisruptive
technologyanditslargesseinwaysthatlimititsgreaterbenefitstosociety.
Alsoconsiderwhatthecoredevelopersandblockchaincompaniesare
alreadydoingtosecuretheirnetworks,anticipatingandrespondingquicklyto
worst-casescenarios.Forexample,in2014,thievesstoleeightmillion
VeriCoins,aproof-of-stakecryptocurrency,fromtheMintPalexchange.Within
daysoftheattack,VeriCoindevelopersreleasednewcodethatforkedthe
VeriCoinblockchainpriortothehack—inasense,theyrolledbacktime—and
collaboratedwithexchangestomakesureitwasadopted.
40
Similarly,“ifmoney
andpowerdotrytocapturethenetwork,theminerswouldstopthembygoingto
therealversionofbitcoinandinitiatingafork,”
41
accordingtoKeonne
Rodriguez,productleadatBlockchain.
What’stopreventChinafromaimingallitsstateprocessingassetsandallits
miningpoolsatthebitcoinblockchaintostagea51percentattackorat
minimumdestabilizetheprocess?Let’ssaysomewealthydespothasdecided
thatbitcoin,liketheInternetbeforeit,hasbecomesoinfluentialthatitiseroding
hispower.Thisdespotcouldseizealltheminingpowerwithinreachand
purchasetherestfromcountriesthatstilltoleratehisbadbehavior,toputhim
overthe50percenthashratethreshold.Hecouldthendecidewhichtransactions
toincludeinblocksandwhichtoreject.Withcontrollinginterest,hecouldalso
decidewhethertoforkthecodeandintroduceafewprohibitions,maybe
blacklistingaddressesassociatedwithgamblingorfreespeech.Sodohonest
nodesadoptthiscentrallycontrolledforkordotheyforkovertoanewcode?
AndrewVegetabile,directoroftheLitecoinAssociation,saidtherewasno
escapefromsuchascenariobecausethedespotcontrolled51percentofthe
network.Andheneedn’trepresentagovernment;hecouldbeoneoftheworld’s
wealthiestpeopleoranexecutiveofahighlyprofitablecompanywith
substantialpurchasingpower.
42
Athirdscenarioisthattheincumbentswilldefendtheirterritory,lobbyingto
makesureexistingregulationsforwell-establishedfirmsapplytosmallstart-
ups,andsuinganystart-upthatsurvivestheregulatoryinquisition.Thislitigate-
not-innovatestrategymaybuythemtimetosortoutastrategy.Oritmaysimply
draintheincumbentofwhateverrealvalueitcontains.Thinkofthosetwin
A
tyrants—legacysystemsandactiveinertia.Academicshavewelldocumented
theeffectsoflock-inandswitchingcostsandhaveidentifiedthechallengesof
postmergersystemsintegration.Organizationswithhugetechnology
investmentsintheirinstalledbasemaybemorelikelytothrowmoremoneyat
theiroldsystem,sharpeningtheirknivesforthepistolfightratherthan
conductingstrategicexperimentsontheblockchain.
5.THEINCENTIVESAREINADEQUATEFORDISTRIBUTEDMASS
COLLABORATION
Minersdohaveanincentivetomaintainthebitcoininfrastructurebecause,ifthe
networkfails,alltheunconvertedbitcointhey’dearned(orcouldearn)through
miningwouldbelostorworthlessorotherwiseatrisk.Beforewedigfurther
intoincentives,let’sbeclearabouttheservicethatminersprovide:itisnot
transactionvalidation.Everyfullnodecanvalidatetransactions.Rather,miners
preservethedistributionofpower—thepowertodecidewhichtransactionsto
includeineachblock,thepowertomintcoins,thepowertovoteonthetruth.
SOYOUWANNABEABITCOIN
MINER?
spartofourresearch,werecruitedBobTapscott—formerbank
CIO,managementconsultantatlarge,andDon’sbrother—to
downloadtheentirebitcoinblockchainstackandledgerinearly
2015.Theexperimentwasinstructiveintermsoftheelapsedtime,the
effortrequired,theenergyconsumed,andthe(lackof)payoffforhobby
miningofbitcoin.
Bobdedicatedhissparefour-thread,two-coreWindowsPCtothe
task.Downloadingtookafullthreedaysandconsumedonaverageabout
20percentoftheavailableprocessingpower.Miningusesslightlymore
than200MBofmemoryand10percentoftheCPUtostaycurrent.
AlthoughBob’scomputerwashardlyoptimizedforminingbitcoin,
heentereditintoaminingpool.Ina137-hoursession,itmined152.8
microbitcoin(μBTC),roughlythreeandahalfU.S.centsatthetime.But
attencentsperkilowatt-hour,Bob’scomputerusedaboutfourteencents
ofelectricity.Bobconcluded,“ThedaysofminingbitcoinsfromyourPC
arenowover.”
Soanydesignchangetotheoriginalbitcoinprotocol,whether
throughanaltcoinoranupgrade,mustkeepinmindappropriate
economicincentivestosustainminerdecentralization,sothatthenetwork
getsgoodvaluefromminersinexchangeforthelargesumsofbitcoin.
BitcoincoredeveloperPeterToddlikenedthistasktodesigningarobot
thatcanbuymilkatthegrocerystore.“Ifthatrobotdoesn’thaveanose,
beforelongstoreownersaregoingtorealizeitcan’ttellthedifference
betweenunspoiledandspoiledmilk,andyou’regoingtogetrippedoff
payingforabunchofspoiledmilk.”
43
ToTodd,thatmeansthatsmaller
minersingeographicallydispersedlocationsshouldbeabletocompete
nosetonosewithlargerminersthataregeographicallycentralized,that
is,largeminingpoolsinIcelandorChina.
Thequestioniswhetherthat’spossible.Becausethenumberofnew
bitcoinsmintedhalveseveryfouryears,whatwillhappenwhenthe
rewarddropstozero?Theminingcycledependsonthemarketpriceof
bitcoin.Whenthepricedrops,somebitcoinminersparktheirsupply,but
theycontinuetoplaythelotteryuntilthepriceincreases.Otherminers
can’taffordtoparkandplay;theyjustdry-docktheirminingrigsor
diverttheirprocessingpowertoanotheraltchainthatmightbemore
profitable.Stillothersjoinminingpools,poolingtheircomputingpower
withnodeswiththehopeofincreasingtheiroddsandatleastgetting
somefractionofthewinningsratherthannothingatall.Andthenthere’s
theindustrialbitcoinminingcomplex.ValeryVavilovofBitFury
estimatedthathisminingoperationwouldhaveatleast200megawatts’
capacitybytheendof2016.
Oneanswerischargingfees.Satoshiwrote,“Therewillbe
transactionfees,so[mining]nodeswillhaveanincentivetoreceiveand
includeallthetransactionstheycan.Nodeswilleventuallybe
compensatedbytransactionfeesalonewhenthetotalcoinscreatedhits
thepre-determinedceiling.”
44
Soonceallbitcoinshavebeenminted,afee
structurewilllikelyemerge.Thinkintermsofbillionsofnanopayments.
Becauseeachblockhasafixedmaximumsize,thereisalimittohow
manytransactionsaminercaninclude.Therefore,minerswilladd
transactionswiththehighestfeesfirst,leavingthosewithloworzerofees
tofightforwhateverspacemightbeleftover.Ifyourtransactionfeeis
highenough,youcanexpectaminertoincludeitinthenextblock;butif
thenetworkisbusyandyourfeeistoolow,itmighttaketwo,three,or
moreblocksbeforeaminereventuallyrecordsintheblockchain.
Whatdoesthatmeanforpeoplewhocan’taffordfeesnow?Won’t
levyingfeeslowertheblockchain’sadvantageovertraditionalpayment
methods?AccordingtoventurecapitalistPascalBouvier,the“feesreflect
themarginalcostofverifyingatransaction.”Withoutfeestoincentivize
miners,astheblockrewardkeepshalving,thehashratewouldlikely
drop.Ifthehashratedrops,networksecuritydeclines.
45
Thatleadsusbacktothe51percentattack,whereahugeminingpool
oracarteloflargeminingpoolscontrolled51percentofthehashrate.
Withthatmuchfirepower,theywouldconstituteamajorityvoteof
minersandcouldhijackblockgenerationandforcetheirversionofthe
truthonthebitcoinnetwork.Theywouldn’tnecessarilygetrich.Farfrom
it.Alltheycoulddoistoreversetheirowntransactionswithinaprevious
block,ratherlikeacreditcardchargeback.Let’ssaytheattackersbought
somebig-ticketitemfromthesamemerchant,waiteduntilitshipped,
thenattackedthenetworktogettheirmoneyback.Thatwouldn’tmean
tackingitsownblocktotheendoftheblockchain.Thatwouldmean
goingbackandredoingtheblockthatcontainedalltheirpurchasesas
wellasallsubsequentblocks,evenasthenetworkcontinuestogenerate
newblocks.Whenthecartel’sbranchbecamelonger,itwouldbecomethe
newvalidone.Satoshibetonthatbeingwildlymorecostlythanmining
newcoins.
Where51percentattacksonproof-of-workmodelsstemfrom
concentratedminingpower,attacksonproof-of-stakemodelscomefrom
concentratedcoincontrol,andcoinexchangesaretypicallythebiggest
stakeholders.Insomejurisdictions,exchangesmustbelicensedandare
underregulatoryscrutiny.Theyalsohavereputationatstake,andsothey
havemultipleincentivestoprotectthevalueoftheirbrandandthevalue
ofthecoinsheldinaccountwallets.However,withmorecoinsin
circulation,agreaterdiversityofvalue,andmorestrategicassets
registeredonPoWandPoSblockchains,anattackermaynotcareabout
anyofthesecosts.
6.THEBLOCKCHAINISAJOBKILLER
Atthe2015WorldEconomicForumannualmeetinginDavos,Switzerland,a
paneloftechnologyexecutivesfromMicrosoft,Facebook,andVodaphone
discussedtheimpactoftechnologyonjobs.Allagreedthat,although
technologicalinnovationsmaydisruptlabormarketstemporarily,overallthey
generatenewandincrementallymorejobs.“Whyshouldthistimebeany
different?”saidEricSchmidt,executivechairofGoogle.
Thedisplacementofworkersthroughautomationisnothingnew.Consider
theInternet’simpactontravelagentsandmusicretailers.UberandAirbnbhave
createdincomefordriverswithextratimeandhomeownerswithsparerooms,
butneitherprovideshealthinsuranceorotheremployeebenefits,andbothare
displacingbetter-paidjobsinthetravelandhospitalityindustries.
Theblockchainisanextraordinaryplatformforradicalautomation,where
computercoderatherthanhumansdothework,managingassetsandpeople.
WhathappenswhenautonomousvehiclesreplaceUberdrivers?Ordigital
currenciesobviateWesternUnion’sfivehundredthousandpointsofsalearound
theworld.
46
Orwhenasharedblockchainplatformforfinancialservices
eliminatestensofthousandsofaccountingandITsystemsmanagementjobs?
Whiletherewillbemanynewbusinessandemploymentopportunitiescreated
throughtheIoT,willitdrivefurtherunemployment,especiallyintherelatively
unskilledmarketforrelativelyroutinetasks?
Inthedevelopingworld,theblockchainandcryptocurrenciescouldenable
entrepreneurstoraisecapital,protectassetsandintellectualproperty,andcreate
jobseveninthepoorestcommunities.Hundredsofmillionscouldbecome
microshareholdersinnewcorporationsandparticipateineconomicexchange.
Thetechnologycouldradicallyimprovethedeliveryanddeploymentofaid,
increasegovernmenttransparency,reducecorruption,andsettheconditionsfor
goodgovernment—apreconditionforjobsinmanypartsoftheworld.
Eveninthedevelopedworldtheeffectsarenotdeterminable.Aglobal
platformthatdropstransactioncosts,inparticularthecostsofestablishing
trustedcommerceandwealthcreation,couldresultinmoreparticipants.
Evenifthistechnologyenablesustodomorewithfewerhumanresources,
westillhavenocasetofear,delay,orhaltitsmarch.Ultimately,whatmattersis
notwhethernewcapabilitiesexistbuttheextenttowhichsocietiesturnthese
intosocialbenefit.Ifmachinesarecreatingsomuchwealth,thenmaybeit’stime
foranewsocialcontractthatredefineshumanworkandhowmuchtimewe
shouldallspendmakingaliving.
7.GOVERNINGTHEPROTOCOLSISLIKEHERDINGCATS
Howshouldwestewardthisnewresourcetofulfillitspotential?Unlikethe
Internet,thebitcoincommunitydoesnotyethaveformaloversightbodiessuch
asICANN,theInternetEngineeringTaskForce,ortheWorldWideWeb
Consortiumtoanticipatedevelopmentneedsandguidetheirresolution—andthe
communityprefersitthatway.Thatpresentsuncertainty.Peoplewhowantto
keeptheblockchaindecentralized,open,andsecurecan’tagreeonaway
forward.Ifwedon’taddressgovernance,thenthemovementcouldcollapseon
itselfasitdisintegratesintowarringfactions.
Therearecountlessissues.BitcoincoredevelopersGavinAndresenand
MikeHearnhavebeenadvocatingforanincreaseinblocksizefromone
megabyteofdatatoaslargeastwentymegabytes.Bitcoinisnot“atokenfor
richpeopletotradebackandforth....Itisapaymentnetwork,”said
Andresen.
47
Theyarguethatifbitcoinisevertocompeteseriouslyasaglobal
paymentmechanism,thenithastoprepareformainstreamadoption.Itcouldn’t
grindtoahaltonedaywhentransactionflowsuddenlysurpassedblockchain
capacity.Feeswouldskyrocketforpeoplewhodidn’twanttowaitmonthsor
yearsfortheirtransactionstosettle.Orperhapssomecentralpowerwouldstep
in,intheinterestofconsumerprotection,andprocesstheoverflow.InAugust
2015,theywentaheadandlaunchedBitcoinXT,aforkoftheblockchainthat
allowsforeight-megabyteblocks.Itisstillacontroversialcompromise.
Opponentsarguethatpeopleshouldn’tbeusingbitcointobuytheirventi
lattesatStarbucks.“Somedeveloperswanteverysinglepersonintheworldto
berunningafullyvalidatingnodethatseeseverysingletransactionandhas
absolutelynotrustonanybodyelse,”saidAndresen.“Thevolunteercontributors
whohavebeenactuallymakingthesoftwareworkforthelastfewyearsare
worriedthattheypersonallymaynotbeabletohandlelargerblocksif
transactionvolumerampsup....Idon’thaveawholelotofsympathyfor
that.”
48
Inotherwords,ifthebitcoinblockchainistoscaleandremainsecure,
thenwecan’thaveitbothways.Somenodeswillrunfullprotocolsandprocess
moretransactionsintoincreasinglylargerblocks,andotherswillrunsimplified
paymentverificationmodelsandtrustthat51percentoffullnodesgetitright.
ThebiggestpushbackagainstBitcoinXTcamefromtheminingpoolsin
China.Seriousbitcoinminers,likehard-coreonlinegamers,neednotonly
seriouslypowerfulcomputerstofindacorrecthashbutalsoseriouslyhigh-speed
bandwidthtobroadcastitquicklyacrossthenetwork.Chinaisanexceptionto
Nielsen’slawofInternetbandwidth:bandwidthdoesn’tincreaseby50percent
eachyear.Iftheblocksizeincreaseistoolarge,itwouldputlow-bandwidth
Chineseminersatadisadvantagecomparedwithminersinotherpartsofthe
world.Receivingnewblockstobuilduponwouldtakelonger;andwhenthey
didfindanewblock,theywouldtakelongertosenditouttotherestofthe
network.Thesedelayswouldultimatelyresultinthenetwork’srejectingsomeof
theirblocks.Theywouldloseouttominerswithmorebandwidthwhoseblocks
propagatedfaster.
“Tryingtobootstraporchangeanetworkprotocolisjustamonumental
task,”saidAustinHill.“Youjustdon’twanttobemakingchangesadhocor
veryfastonanecosystemthat’smanaginganywherefromthreetotenbillion
dollars’worthofpeople’swealthandassets.”
49
Attheendoftheday,said
Andresen,“Thatgovernancemodelisdrivenverymuchbywhatcodethepeople
actuallywanttorun,whatstandardspeoplewanttoimplementintheequipment
theysell.”Hesaidthatbitcoin,liketheInternet,will“haveasimilarmessy,
chaoticgovernanceprocessthatwilleventuallycomedowntowhatcodesthe
peoplechoosetorun.”
50
Again,we’renottalkingaboutregulatingbutaboutstewardingthisresource
forviabilityandsuccess.Governanceincludessettingstandards,advocatingand
adoptingsensiblepolicies,developingknowledgeaboutthetechnology’s
potential,performingwatchdogfunctions,andactuallybuildingouttheglobal
infrastructure.Wediscussamultistakeholdergovernancemodelinthenext
chapter.
8.DISTRIBUTEDAUTONOMOUSAGENTSWILLFORMSKYNET
Therearehighlydistributedenterpriseswitharangeofgoodandbadactors.
Anonymous,adistributedaffinitygroupofvolunteers,consistsofcorporate
saboteurs,whistleblowers,andwatchdogs.Withtheblockchain,Anonymous
couldcrowdsourcebitcoinandholdthesefundsinawallet.Let’ssayagroupof
Frenchshareholderswouldliketogivethatmoneytoafewassassinswhowould
trackdownandkillofftheunaccounted-forterroristsresponsiblefortheParis
massacre.They’dneedthousandsofsignatoriestoreachconsensusandrelease
thefunds.Inthisscenario,wholegallycontrolsthosefunds?Whoisresponsible
fortheoutcomeofthattransaction?Ifyou’vecontributedoneten-thousandthof
avote,whatisyourlegalliability?
51
Ifvendingmachinesareprogrammedtoorderthemostprofitableproducts,
willtheydiscoverasupplierforillegalgoodsordrugs?(Hey,thecandymachine
issellingEcstasy!)Howshouldthelawhandleanautonomousvehiclethat
accidentallykillsahumanbeing?ForWiredmagazine,twohackers
demonstratedhowtohijackthecontrolsystemsofaJeepCherokeeonthe
highway.Chryslerrespondedbyrecalling1.4millionvehiclesandalarming
drivers,manufacturers,andpolicymakersalike.
52
Couldterroristsfigureouthow
tohacksmartdevicessothattheyperformedunwantedactionswithdevastating
consequences?
Thereareotherchallengeswithdistributedmodelsoftheenterprise.How
doessocietygoverntheseentities?Howcanownerskeepultimatecontrol?How
dowepreventhostiletakeoversofpersonlessbusinesses?Let’ssayweowna
decentralizedWebhostingcompanywhereeachoftheservershasasayin
companymanagement.Ahumanhackerorsomemalwarecouldpretendtobea
millionserversandoutvotethelegitimateserversinthenetwork.Whensuch
takeoversoftraditionalcompaniesoccur,theresultscanvary.WithaDAE,the
resultswillmostlikelybedisastrous.Oncethatmalevolententitycontrolsour
distributedWebhostingcompany,itcouldcashout.Oritcouldreleasethe
privatedatafromotherserversorholdthedatahostageuntilwehumanowners
paidaransom.
Oncemachineshaveintelligenceandtheabilitytolearn,howquicklywill
theybecomeautonomous?Willmilitarydronesandrobots,forexample,decide
toturnoncivilians?AccordingtoresearchersinAI,we’reonlyyears,not
decades,awayfromtherealizationofsuchweapons.InJuly2015,alargegroup
ofscientistsandresearchers,includingStephenHawking,ElonMusk,andSteve
Wozniak,issuedanopenlettercallingforabanonthedevelopmentof
autonomousoffensiveweaponsbeyondmeaningfulhumancontrol.
53
“Thenightmareheadlineformeis,‘100,000RefrigeratorsAttackBankof
America,’”saidVintCerf,widelyregardedasthefatheroftheInternet.“Thatis
goingtotakesomeseriousthinkingnotonlyaboutbasicsecurityandprivacy
technology,butalsohowtoconfigureandupgradedevicesatscale,”headded,
notingthatnoonewantstospendtheirentireweekendtypingIPaddressesfor
eachandeveryhouseholddevice.
54
WedonotrecommendbroadregulationofDAEsandtheIoTorregulatory
approvals.Wedorecommendthatmanagersandentrepreneurswhoare
developingappsidentifyanysignificantpublicimpacts—good,bad,orneutral—
andaltersourcecodeanddesigns.Wethinktheyshouldconsultwiththoselikely
affectedbytheircreationstominimizerisksinadvance,identifyalternative
pathsforward,andbuildsupport.
9.BIGBROTHERIS(STILL)WATCHINGYOU
“Therewillbemanyattemptstocontrolthenetwork,”saidKeonneRodriguezof
Blockchain.“Bigcompaniesandgovernmentswillbedevotedtobreakingdown
privacy.TheNationalSecurityAgencymustbeactivelyanalyzingdatacoming
throughtheblockchain”evennow.
55
Whileblockchainsensureadegreeof
anonymity,theyalsoprovideadegreeofopenness.Ifpastbehaviorisany
indicationoffutureintent,thenweshouldexpectcorporationsknownforspying
andcountriesknownforwagingcyberwarfaretoredoubletheireffortsbecause
valueisinvolved—money,patents,accesstomineralrights,thetitlestolandand
nationaltreasures.It’sasifwe’veplacedabigbull’s-eyeontopoftheInternet.
Thegoodnewsisthateveryonewillbeabletoseetheshenanigans.Somemay
behighlymotivatedto“out”spying,becausetheybetonthelikelihoodofa
particularregime’sattackingtheblockchaininapredictionmarket.
Whathappenstoprivacywhenthephysicalworldstartscollecting,
communicating,andanalyzinginfinitedatathatcoulddoganindividualforever?
Ina2014presentationatWebstock,MaciejCeglowskirantedaboutGoogle’s
acquisitionofNest,amakerofluxurythermostatswithsensorsthatcollectdata
aboutrooms.Hisoldthermostatdidn’tcomewithaprivacypolicy.Thissmart
thermostatcouldreportbacktoGoogle,maybeeveneathisleftoverpizzalikea
sketchyroommate.
56
Manyofusarealreadyuncomfortablewithasocialmedia
environmentthattracksourwhereaboutsandbarragesuswithpersonalized
marketingmessageswhereverwego.Intheblockchainworld,we’llhavebetter
controloversuch,butwillwebevigilantenoughtomanageourmediadiet?
Noneoftheseprivacychallengesaretrueshowstoppers.Continued
Ceglowski:“Thegoodnewsis,it’sadesignproblem!WecanbuildanInternet
that’sdistributed,resilient,irritatingtogovernmentseverywhere,andfreeinthe
bestsenseoftheword,”aswewantedittobeinthe1990s.AnnCavoukianof
thePrivacyandBigDataInstituteoutlinedsevenprinciplesfordesignthatare
“goodforbusiness,goodforgovernment,goodforthepublic.”Thefirstis
critical:makeprivacythedefaultsetting.Rejectfalsedichotomiesthatpit
privacyagainstsecurity;everyITsystem,everybusinesspractice,andall
infrastructureshouldhavefullfunctionality.Leadersneedtopreventratherthan
reacttoviolations,maintaintransparencyinalloperations,andsubjecttheir
organizationstoindependentverification.Brandswillearnpeople’strustby
respectinguserprivacy,keepingusersatthecenterofdesign,andensuringend-
to-endsecurityoftheirdata,destroyingitwhennolongerneeded.Shesaid,“It
reallyisawin-winproposition,rejectingzero-sumandembracingpositive-
sum.”
57
SaidCeglowski,“Butitwilltakeeffortanddetermination.Itwillmean
scrappingpermanentmasssurveillanceasabusinessmodel,whichisgoingto
hurt.Itwillmeanpushinglawsthroughascleroticlegalsystem.Therewillhave
tobesomenagging.Butifwedon’tdesignthisInternet,ifwejustcontinueto
builditout,theneventuallyitwillattractsomeremarkable,visionarypeople.
Andwe’renotgoingtolikethem,andit’snotgoingtomatter.”
58
10.CRIMINALSWILLUSEIT
Initsearlydays,naysayersoftencondemnedbitcoinasatoolforlaundering
moneyorbuyingillicitgoods.Criticsarguedthat,becausethetechnologyis
decentralized,lightningquick,andpeertopeer,criminalswouldexploitit.
Chancesare,you’veheardofSilkRoad,thedarkWebmarketplaceforillegal
drugs.AtitspeakinOctober2013,SilkRoadhad13,756listingspricedin
bitcoin.Productsweredeliveredbymailwithaguidetoavoidingdetectionby
authorities.WhentheFBIseizedthesite,thepriceofbitcoinplummetedand
digitalcurrenciesbecamesynonymouswithcrime.Itwasbitcoin’sdarkesthour.
Butthereisnothinguniquetobitcoinorblockchaintechnologythatmakesit
moreeffectiveforcriminalsthanothertechnologies.Authoritiesingeneral
believethatdigitalcurrenciescouldhelplawenforcementbyprovidingarecord
ofsuspiciousactivities,maybeevensolvingamultitudeofcybercrimes,from
financialservicestotheInternetofThings.MarcGoodman,authorofFuture
Crimes,arguedrecently,“There’sneverbeenacomputersystemthat’sproven
unhackable.”
59
Opportunitiesforcrimehavescaledwithtechnology.“The
abilityofonetoaffectmanyisscalingexponentially—andit’sscalingforgood
andit’sscalingforevil.”
60
Sothisfallsunderthecategoryofhumanbeings
wantingtoharmotherhumanbeings.Criminalswillusethelatesttechnologyto
doit.
However,bitcoinandblockchaintechnologycoulddiscouragecriminaluse.
First,evencriminalsmustpublishalltheirbitcointransactionsintheblockchain,
andsolawenforcementcantrackpaymentsinbitcoinmoreeasilythancash,still
thedominantpaymentmediumforcriminals.TheoldWatergateadage,“follow
themoney”tofindthecrook,isactuallymoredoableontheblockchainthan
withotherpaymentmethods.Bitcoin’spseudonymousnaturehasregulators
dubbingbitcoins“prosecutionfutures”becausetheycanbetrackedand
reconciledmoreeasilythancash.
AftereachmassshootinginAmerica,U.S.representativeswhose
constituentsandcampaignfundersarecard-carryingmembersoftheNational
RifleAssociationarequicktosay,“Don’tblamegunsforallthegunviolencein
America!”Itwouldbeveryrichindeedifthesesamepeoplebannedblockchain
technologybecauseofthecrimessomepeoplemightcommitonit.Technology
doesnothaveagency.Itdoesnotwantforanythingorhaveaninclinationone
wayortheother.Moneyisatechnology,afterall.Whensomeonerobsabank,
wedon’tblamethemoneythatsitsinthevaultfortherobbery.Thefactthat
criminalsusebitcoinspeaksmoretothelackofstronggovernance,regulation,
advocacy,andeducationthantoitsunderlyingvirtues.
REASONSBLOCKCHAINWILLFAILORIMPLEMENTATION
CHALLENGES?
Sotheobstaclesareformidable.Loominginthedistanceisquantumcomputing,
thecryptographersY2Kproblem.Itcombinesquantummechanicsand
theoreticalcomputationtosolveproblems—suchascryptographicalgorithms—
vastlyfasterthantoday’scomputers.SaidSteveOmohundro,“Quantum
computers,intheory,canfactorverylargenumbersveryrapidlyandefficiently,
andmostofthepublickeycryptographysystemsarebasedontaskslikethat.
Andsoiftheyturnouttobereal,thenthewholecryptographyinfrastructureof
theworldisgoingtohavetochangedramatically.”
61
Thedebateover
technologicalinnovationandprogressisanancientone:Isthetoolgoodorbad?
Doesitadvancethehumanconditionordegradeit?AssatiristJamesBranch
Cabellobserved,“Theoptimistproclaimsthatweliveinthebestofallpossible
worlds.Thepessimistfearsthisistrue.”
62
AsthestoryofLevTermenshows,individualsandorganizationscanuse
innovationsforgoodandforevil,andthathasbeentrueacrossabroadrangeof
technologies,fromelectricitytotheInternet.YochaiBenkler,authorofthe
seminalworkTheWealthofNetworks,toldus,“Technologyisnotsystematically
biasedinfavorofinequalityandstructureofemployment;thatisafunctionof
social,political,andculturalbattles.”Whiletechnologycanchangebusinessand
societydramaticallyandswiftly,Benklerbelievesitis“notinadeterministic
way,onewayortheother.”
63
Inbalance,thearcoftechnologicalhistoryhasbeenapositiveone.Consider
themanyadvancesinfoodandmedicine,fromR&Dtotreatmentand
prevention:technologyhasmadeforgreaterhumanequity,productivecapability,
andsocialprogress.
Thereisnothingtosuggestblockchaincouldn’tfallintothesametrapasthe
Internetdid.Itmayberesistanttocentralizationandcontrol;butiftheeconomic
orpoliticalrewardsaregreatenough,powerfulforceswilltrytocaptureit.
Leadersofthisnewdistributedparadigmwillneedtostaketheirclaimand
initiateawaveofeconomicandinstitutionalinnovationinordertoensurethat
everyonehastheopportunity.Thistime,let’sfulfillthepromise.Whichbrings
ustotheissueofmakingallthishappen.
P
CHAPTER11
LEADERSHIPFORTHENEXTERA
rolificisanadjectivethatshouldprecedealltitlesusedtodescribetwenty-
one-year-oldVitalikButerin,theRussian-bornCanadianfounderof
Ethereum.(Prolificfounder,thatis.)Askhislegionoffollowersabout
Ethereum,andthey’lltellyouit’sa“blockchain-based,arbitrary-state,Turing-
completescriptingplatform.”
1
IthasattractedIBM,Samsung,UBS,Microsoft,
andtheChineseautogiantWanxiang,andanarmyofthesmartestsoftware
developersintheworld,allofwhomthinkthatEthereummaybethe“planetary
scalecomputer”thatchangeseverything.
2
WhenButerinexplained“arbitrary-state,Turing-complete”tous,wegota
glimpseofhismind.Listeningtomusicisverydifferentfromreadingabookor
calculatingtheday’srevenuesandexpenses,andyetyoucandoallthreeonyour
smartphone,becauseyoursmartphone’soperatingsystemisTuringcomplete.
ThatmeansthatitcanaccommodateanyotherlanguagethatisTuringcomplete.
SoinnovatorscanbuildjustaboutanydigitalappimaginableonEthereum—
appsthatperformverydissimilartasks,fromsmartcontractsandcomputational
resourcemarketplacestocomplexfinancialinstrumentsanddistributed
governancemodels.
Buterinisapolyglot.HespeaksEnglish,Russian,French,Cantonese(which
helearnedintwomonthsonvacation),ancientLatin,ancientGreek,BASIC,
C++,Pascal,andJava,tonameafew.
3
“Ispecializeingeneralism,”hesaid.He
isalsoapolymath,andamodestoneatthat.“Ihadallthesedifferentinterests,
andsomehowbitcoinseemedlikeaperfectconvergence.Ithasitsmath.Ithas
itscomputerscience.Ithasitscryptography.Ithasitseconomics.Ithasits
politicalandsocialphilosophy.ItwasthiscommunitythatIwasimmediately
drawninto,”hesaid.“Ifounditreallyempowering.”Hewentthroughtheonline
forums,lookedforwaystoownsomebitcoin,anddiscoveredaguywhowas
startingupabitcoinblog.“ItwascalledBitcoinWeekly,andhewasoffering
peoplefivebitcoinstowritearticlesforhim.Thatwasaroundfourdollarsatthe
time,”Buterinsaid.“Iwroteafewarticles.Iearnedtwentybitcoins.Ispenthalf
ofthemonaT-shirt.Goingthroughthatwholeprocess,itfeltalmostlike
workingwiththefundamentalbuildingblocksofsociety.”
4
Allthisfromamanwho,nearlyfiveyearsearlier,haddismissedbitcoin.
“AroundFebruary2011,mydadmentionedtome,‘Haveyouheardofbitcoin?
It’sthiscurrencythatexistsonlyontheInternetandit’snotbackedbyany
government.’Iimmediatelythought,‘Yes,thisthinghasnointrinsicvalue,
there’snowayit’sgoingtowork.’”Likemanyteenagers,Buterin“spent
ridiculousamountsoftimeontheInternet,”readingaboutdifferentideasthat
wereheterodox,outofthemainstream.Askhimwhicheconomistshelikes,and
herattlesoffTylerCowen,AlexTabarrok,RobinHanson,andBryanCaplan.He
canspeakontheworksofgametheoristThomasSchellingandbehavioral
economistsDanielKahnemanandDanAriely.“It’sactuallysurprisinglyuseful,
howmuchyoucanlearnforyourselfbydebatingideaslikepoliticswithother
peopleonforums.It’sasurprisingeducationalexperienceallbyitself,”hesaid.
Bitcoinkeptcomingup.
Bytheendofthatyear,Buterinwasspendingtentotwentyhoursaweek
writingforanotherpublication,BitcoinMagazine.“WhenIwasabouteight
monthsintouniversity,Irealizedthatithadtakenovermyentirelife,andI
mightaswellletittakeovermyentirelife.Waterloowasareallygood
universityandIreallylikedtheprogram.Mydroppingoutwasdefinitelynota
caseoftheuniversitysucking.Itwasmoreamatterof,‘Thatwasfun,andthisis
morefun.’Itwasaonce-in-a-lifetimeopportunityandIjustbasicallycouldn’tlet
itgo.”Hewasonlyseventeenyearsold.
ButerincreatedEthereumasanopensourceprojectwhenherealizedthat
blockchainscouldgofarbeyondcurrencyandthatprogrammersneededamore
flexibleplatformthanthebitcoinblockchainprovided.Ethereumenablesradical
opennessandradicalprivacyonthenetwork.Heviewsthesenotasa
contradictionbutas“asortofHegeliansynthesis,”adialecticbetweenthetwo
thatresultsin“volunteeredtransparency.”
Ethereum,likesomanytechnologiesthroughouthistory,coulddislocate
jobs.Buterinbelievesthisisanaturalphenomenoncommontomany
technologiesandsuggestsanovelsolution:“Withinahalfcentury,wewillhave
abandonedthemodelthatyoushouldhavetoputineighthoursoflaborevery
daytobeallowedtosurviveandhaveadecentlife.”
5
However,whenitcomes
toblockchain,he’snotconvincedthatmassivejoblossesareinevitable.
Ethereumcouldcreatenewopportunitiesforvaluecreationand
entrepreneurship.“Whereasmosttechnologiestendtoautomateworkersonthe
peripherydoingmenialtasks,blockchainsautomateawaythecenter,”hesaid.
“Insteadofputtingthetaxidriveroutofajob,blockchainputsUberoutofajob
andletsthetaxidriversworkwiththecustomerdirectly.”Blockchaindoesn’t
eliminatejobssomuchasitchangesthedefinitionofwork.Whowillsuffer
fromthisgreatupheaval?“Isuspectandhopethecasualtieswillbelawyers
earninghalfamilliondollarsayearmorethananyoneelse.”
6
SoButerinknows
hisShakespeare:“Thefirstthingwedo,let’skillallthelawyers.”
7
Ethereumhasanotherapparentcontradiction.Itisunabashedly
individualisticandprivateandyetitdependsuponalarge,distributed
communityactingopenlyincollectiveself-interest.Indeed,Ethereum’sdesign
neatlycapturesbothhisenduringfaiththatindividualswilldotherightthing
whenequippedwiththerighttools,andhishealthyskepticismofthemotivesof
largeandpowerfulinstitutionsinsociety.WhileButerin’scritiqueofthe
problemsofcontemporarysocietyisgrave,histoneisclearlyoneofhope.
“Whiletherearemanythingsthatareunjust,Iincreasinglyfindmyself
acceptingtheworldasis,andthinkingofthefutureintermsofopportunities.”
Whenhelearnedthat$3,500wouldenablesomeonetocombatmalariatherest
ofherlife,hedidn’tbemoanthelackofdonationsfromindividuals,
governments,andcorporations.Hethought,“Ohwow,youcansavealifefor
only$3,500?That’sareallygoodreturnoninvestment!Ishoulddonatesome
rightnow.”
8
Ethereumishistooltoeffectpositivechangeintheworld.“Isee
myselfmoreaspartofthegeneraltrendofimprovingtechnologysothatwecan
makethingsbetterforsociety.”
Buterinisanatural-bornleader,inthathepullspeoplealongwithhisideas
andhisvision.He’sthechiefarchitect,chiefachieverofconsensusinthe
Ethereumcommunity,andchiefcultivatorofabroadercommunityofbrilliant
developerswhohavestrongopinionsaboutanythingtechnical.Whatifhe
succeeds?
WHOWILLLEADAREVOLUTION?
In1992,MITcomputerscientistDavidClarksaid,“Werejectkings,presidents,
andvoting.Webelieveinroughconsensusandrunningcode.”
9
Thatwasthe
mantraforstewardsofthefirstgenerationoftheInternet.Itwasvoicedatatime
whenmostpeoplecouldscarcelyimaginehowtheInternetwouldbecomeanew
mediumofhumancommunications,onethatwouldarguablysurpassprevious
mediainitsimportanceforsocietyanddailylife.Clark’swordsembodieda
philosophyfortheleadershipandgovernanceofaglobalresourcethatwas
radicallydifferentfromthenorm,yetonethatengenderedaremarkablyeffective
governanceecosystem.
SincetheendofWorldWarII,state-basedinstitutionshavegoverned
importantglobalresources.Twoofthemostpowerful—theInternational
MonetaryFundandtheWorldTradeOrganization—werebornattheBretton
WoodsConferencein1944.TheUnitedNationsandothergroupsunderits
umbrella,suchastheWorldHealthOrganization,receivedawideberthto
exercisetheirmonopolyonglobalproblemsolving.Theseorganizationswere
hierarchicalbydesign,becausehierarchieswerethedominantparadigmduring
thefirsthalfofawar-torncentury.Buttheseindustrial-scalesolutionsareill
suitedtothechallengesofthedigitalera.TheriseoftheInternetmarkeda
significantdeparturefromthetraditionalcultureofgovernance.
In1992,mostInternettrafficwase-mail.Thegraphicalbrowserthatenabled
TimBerners-Lee’sextraordinaryWorldWideWebwastwoyearsaway.Most
peopleweren’tconnectedanddidn’tunderstandthetechnology.Manyofthe
importantinstitutionsthatwouldcometostewardthisimportantglobalresource
wereeitherembryonicornonexistent.BarelyfouryearsoldwastheInternet
EngineeringTaskForce,aninternationalcommunitythathandlesmanyaspects
ofInternetgovernance.TheInternationalCorporationforAssignedNamesand
Numbers(ICANN),whichdeliversessentialservicessuchasdomainnames,
wassixyearsawayfromexistence;andVintCerfandBobKahnwerejust
recruitingpeopleforwhatwouldultimatelybecometheInternetSociety.
ThesecondgenerationoftheInternetenjoysmuchofthesamespiritand
enthusiasmforopennessandaversiontohierarchies,manifestedintheethosof
Satoshi,Voorhees,Antonopoulos,Szabo,andVer.Opensourceisagreat
organizingprinciplebutit’snotamodusoperandiformovingforward.Asmuch
asopensourcehastransformedmanyinstitutionsinsociety,westillneed
coordination,organization,andleadership.OpensourceprojectslikeWikipedia
andLinux,despitetheirmeritocraticprinciples,stillhavebenevolentdictatorsin
JimmyWalesandLinusTorvalds.
Tohiscredit,SatoshiNakamotoalignedstakeholderincentivesbycoding
principlesofdistributedpower,networkedintegrity,indisputablevalue,
stakeholderrights(includingprivacy,security,andownership),andinclusiveness
intothetechnology.Asaresult,thetechnologyhasbeenabletothriveinthe
earlyyears,blossomingintotheecosystemweknowtoday.Still,thisdeistic
hands-offapproachisstartingtoshowsignsofstrain.Aswithalldisruptive
technologies,therearecompetingviewsintheblockchainecosystem.Eventhe
coreblockchaincontingenthassplitintodifferentcryptocamps,eachadvocating
aseparateagenda.
BrianForde,theformerWhiteHouseinsiderandblockchainadvocatewho
nowheadsMIT’sDigitalCurrencyInitiative,said,“Ifyoulookattheblock-size
debate,isitreallyadebateaboutblocksize?Inthemedia,it’sadebateabout
blocksize,butIthinkwhatwe’reseeingisthatit’salsoadebateon
governance.”
10
Whatkindofgovernance,andmorespecifically,whatkindof
leadershipisneeded?Indeed,MikeHearn,aprominentbitcoincoredeveloper,
causedquiteastirinJanuary2015,whenhewroteafarewelllettertothe
industryforetellingbitcoin’simminentdemise.Init,heoutlinedafewpressing
challengesfacingtheindustry;namely,thatimportanttechnicalstandards
questionshadgoneunansweredandthattherewasdiscordandconfusioninthe
ranksofthecommunity.Hearn’sconclusionwasthatthesechallengeswould
causebitcointofail.Wedisagree.Indeed,whatHearnintendedasadamning
critiqueofbitcoin’sshortcomingsbecame,inoureyes,oneofthemosteloquent
treatisesontheimportanceofmultistakeholdergovernance,basedon
transparency,merit,andcollaboration.Codealoneisjustatool.Forthis
technologytoreachitsnextstageandfulfillitslong-termpromise,humansmust
lead.Wenowneedallconstituents—allstakeholdersinthenetwork—tocome
togetherandaddresssomemission-criticalissues.
We’vealreadyoutlinedsomeoftheshowstoppers.Theyaresignificant.But
theyarechallengestothisrevolution’ssuccess,notreasonstoopposeit.Todate,
manyissuesarestillunsolvedandmanyquestionsunanswered,withlittle
collectivemovementtoresolvethem.Howwillthetechnologyscale,andcanwe
scaleitwithoutdestroyingthephysicalenvironment?Willpowerfulforces
chokeinnovationorco-optit?Howwillweresolvecontroversialstandards
questionswithoutrevertingtohierarchy?
Howtoanswerthosequestionshasbeenthefocusofourresearchoverthe
lasttwoyears.Wefoundthat,insteadofstate-basedinstitutions,weneed
collaborationsofcivilsociety,privatesector,government,andindividual
stakeholdersinnonstatenetworks.Callthemglobalsolutionnetworks(GSNs).
TheseWeb-basednetworksarenowproliferating,achievingnewformsof
cooperation,socialchange,andeventheproductionofglobalpublicvalue.
OneofthemostimportantistheInternetitself—curated,orchestrated,and
otherwisegovernedbyaonce-unthinkablecollectionofindividuals,civilsociety
organizations,andcorporations,withthetacitandsometimesactivesupportof
nation-states.Butnogovernment,country,corporation,orstate-basedinstitution
controlstheInternet.Itworks.Indoingso,ithasproventhatdiverse
stakeholderscaneffectivelystewardaglobalresourcebyinclusiveness,
consensus,andtransparency.
Thelessonsareclear.Goodgovernanceofsuchcomplexglobalinnovations
isnotthejobofgovernmentalone.Norcanweleaveittotheprivatesector:
commercialinterestsareinsufficienttoensurethatthisresourceservessociety.
Rather,weneedallstakeholdersgloballytocollaborateandprovideleadership.
THEBLOCKCHAINECOSYSTEM:YOUCAN’TTELLTHEPLAYERS
WITHOUTAROSTER
Althoughblockchaintechnologyemergedfromtheopensourcecommunity,it
quicklyattractedmanystakeholders,eachwithdifferentbackgrounds,interests,
andmotives.Developers,industryplayers,venturecapitalists,entrepreneurs,
governments,andnongovernmentorganizationshavetheirownperspectives,
andeachhasaroletoplay.Thereareearlysignsthatmanyofthecore
stakeholdersseetheneedforleadershipandaresteppingup.Let’sreviewwho
theplayersare:
BlockchainIndustryPioneers
Vanguardsintheindustry,fromErikVoorheestoRogerVer,believeanyformof
formalgovernance,regulation,stewardship,oroversightisnotonlyfoolish,but
antitheticaltotheprinciplesofbitcoin.
11
SaidVoorhees,“Bitcoinisalreadyvery
wellregulatedbymathematics,whicharenotuptothewhimsof
governments.”
12
However,astheindustryhasexpanded,manyentrepreneursare
seeingahealthydialoguewithgovernments,andafocusongovernancemore
broadly,asagoodthing.CompanieslikeCoinbase,Circle,andGeminihave
joinedtradeorganizations;andsomeevenmaintaincloserelationswith
emerginggovernanceinstitutions,suchastheDigitalCurrencyInitiativeatMIT.
VentureCapitalists
WhatstartedasacliqueofcryptoinsidersquicklysnowballedintoSilicon
Valley’sbiggestandbrightestVCs,includingthevenerableAndreessen
Horowitz.Nowfinancialservicestitansareplayingventurecapitalist:Goldman
Sachs,NYSE,Visa,Barclays,UBS,andDeloittehavemadedirectinvestments
instart-upsorsupportedincubatorsthatnurturenewventures.Pensionfundsare
enteringthefray.OMERSVentures,thebillion-dollarventurearmofoneof
Canada’slargestpublicsectorpensions,madeitsfirstinvestmentin2015.Jim
Orlando,whorunsthatgroup,islookingforthenextkillerappthat“doesfor
blockchainwhattheWebbrowserdidfortheInternet.”
13
Investmenthas
exploded—fromtwomilliondollarsin2012tohalfabillioninthefirsthalfof
2015.
14
Theexcitementispalpable.TimDrapertoldusthat,ifanything,
“financiersareunderestimatingthepotentialofblockchain.”
15
Vocalventure
capitalistscanadvocateforthetechnologyandsupportnascentgovernance
institutions,suchasCoinCenter,bankrolledbyAndreessenHorowitz.Digital
CurrencyGroup,aventurefirmfoundedbyBarrySilbert,hasappointed
academicsandothernontraditionaladviserstoitsboardtoacceleratethe
developmentofabetterfinancialsystemthroughbothinvestmentandadvocacy.
BanksandFinancialServices
Perhapsinnootherindustryhaveweseenaswifterchangeofopinion.Forthe
longesttime,mostfinancialinstitutionsdismissedbitcoinasthespeculativetool
ofgamblersandcriminals,andbarelyevenregisteredblockchainontheirradars.
Todaytheyarequiteliterally“allin.”Watchingthisunfoldinrealtimein2015
wastrulyincredible.Before2015,fewmajorfinancialinstitutionshad
announcedinvestmentsinthesector.TodayCommonwealthBankofAustralia,
BankofMontreal,SociétéGénérale,StateStreet,CIBC,RBC,TDBank,
MitsubishiUFJFinancialGroup,BNYMellon,WellsFargo,MizuhoBank,
Nordea,ING,UniCredit,Commerzbank,Macquarie,anddozensofothersare
investinginthetechnologyandwadingintotheleadershipdiscussion.Mostof
theworld’sbiggestbankshavesigneduptotheR3consortiumandmanymore
havepartneredwiththeLinuxFoundationtolaunchtheHyperledgerProject.
Banksshouldbeincludedinthediscussionaboutleadership,butother
stakeholdersmustremaincautiousofpowerfulincumbentslookingtocontrol
thistechnology,justastheyhadtotreadcautiouslyintheearlydaysofthe
Internet.
Developers
Developersinthecommunityaresplitonbasictechnicalissues,andthe
communityisexpressinganeedforcoordinationandleadership.Gavin
Andresen,thebitcoincoredeveloperatthecenteroftheblock-sizedebate,told
us,“I’dprefertostayintheengineroom,keepingthebitcoinenginegoing”
16
ratherthanspendingeverywakingmomentadvocatinghisposition.However,
giventhelackofclearleadership,Andresenhasbeeninadvertentlycastinthe
spotlight.Inthesummerof2015,hetoldus,“Myjoboverthenextsixmonthsis
tofocusonbitcoin’stechnicallife,makingsurebitcoinisstillaroundintwoor
threeyearsforthosebusinessestohappen:micropayments,stocktrading,or
propertytransfer,alltheseotherthings,”whichinvolvesalotofadvocatingand
lobbying.Tohim,theInternetgovernancenetworkisausefulstartingpoint.“I
alwayslookforrolemodels.ThefigurerolemodelistheIETF.”
17
Howthe
Internetisgovernedis“kindofchaoticandmessy,”hesaid,butitworksandit’s
reliable.
Academia
Academicinstitutionsarefundinglabsandcenterstostudythistechnologyand
collaboratewithcolleaguesoutsidetheirsilo.BrianFordetoldus,“Westarted
DCItocatalyzesomeofthegreatresourceswehaveatMITtofocusonthis
technology,becausewethinkit’sgoingtobeoneofthemostimportant
technologicaltransformationsoverthenexttenyears.”
18
JoichiIto,directorof
theMITMediaLab,sawanopportunityforacademiatostepup:“MITandthe
academiclayercanbeaplacewherewecandoassessments,doresearch,andbe
abletotalkaboutthingslikescalabilitywithoutanybiasorspecialinterests.”
19
JerryBrito,oneofthemostprominentlegalvoicesinthespace—firstatthe
MercatusCenteratGeorgeMasonUniversityandnowasdirectorofCoin
Center,anot-for-profitadvocacygroup—said,“Governancecomesintoplay
wherethereareseriousdecisionsthatneedtobemade,andyouneedaprocess
forthattohappen.”
20
HerecommendedstartingwiththeHippocraticoath:first,
donoharm.Thecurrentbottom-upapproachthatbitcoin’scoredevelopersare
using“isshowingalittlebitofitsroughedgesrightnowwiththeblock-size
debate.It’sgoingtobeverydifficulttogetanyconsensus,”Britosaid.“Wewant
tohelpdevelopthatforumandfosteraself-regulatoryorganizationifitcomesto
that.”
21
NotableuniversitiessuchasStanford,Princeton,NewYorkUniversity,
andDukealsoteachcoursesonblockchain,bitcoin,andcryptocurrencies.
22
Governments,Regulators,andLawEnforcement
Governmentsallovertheworldareuncoordinatedintheirapproach—some
favoringlaissez-fairepolicy,othersdivinginwithnewrulesandregulations
suchastheBitLicenseinNewYork.Someregimesareopenlyhostile,though
thisisincreasinglyafringeresponse.Likewise,theindustryissplittinginto
factions,thosewhosupportthenewrulesandthosewhodonot.Eventhosewho
resistgovernmentinterventionacknowledgethattheirenthusiasmtowadeinto
governancedebatesisanetpositive.AdamDraper,aprolificVCintheindustry,
acknowledged,albeitreluctantly,“Governmentendorsementcreatesinstitutional
endorsement,whichhasvalue.”
23
Centralbanksgloballyareeachtaking
differentstepstounderstandthistechnology.BenjaminLawsky,former
superintendentoffinancialservicesfortheStateofNewYork,saidstrong
regulationsarethefirststeptowardindustrygrowth.
24
NongovernmentOrganizations
Theyear2015provedtransformativefortheburgeoningconstellationofNGOs
andcivilsocietyorganizationsfocusedspecificallyonthistechnology.Though
Forde’sDCIishousedwithinMIT,weincludeithere.Othersuchgroupsinclude
Brito’sCoinCenterandPerianneBoring’sChamberofDigitalCommerce.
Thesegroupsaregainingtractioninthecommunity.
Users
Thismeansyouandme—peoplewhocareaboutidentity,security,privacy,our
otherrights,long-termviability,fairadjudication,oraforumforrightingwrongs
andfightingcriminalswhousetechnologytodestroywhatwecareabout.
Everyoneseemsdividedonbasictaxonomyandcategorization:Doesblockchain
refertothebitcoinblockchainorthetechnologyingeneral?Isitbig“B”
Blockchainorlittle“b”blockchain?Isitacurrency,commodity,ortechnology?
Isitallofthesethingsornoneofthesethings?
WomenLeadersinBlockchain
Asmanyhaveobserved,theblockchainmovementisoverpopulatedwithmen.
Intechnologyandengineering,malesstilloutnumberfemalesbyawidemargin.
However,high-profilewomenarefoundingandmanagingcompaniesinthe
space:BlytheMasters,CEOofDigitalAssetHoldings;CindyMcAdam,
presidentofXapo;MelanieShapiro,CEOofCaseWallet;JoyceKim,executive
directorofStellarDevelopmentFoundation;ElizabethRossiello,CEOand
founderofBitPesa;andPamelaMorgan,CEOofThirdKeySolutions.Manyof
themhavesuggestedtheindustryisverywelcomingtoallvoices,maleand
femalealike.Venturecapitalinblockchainisalsogainingindiversity.Arianna
Simpson,formerheadofbusinessdevelopmentatBitGo,isnowaninvestorin
thesector.JalakJobanputraisaninvestorwhoseVCfundfocuseson
decentralizedtechnology.
Whenitcomestogovernanceandstewardshipofthisglobalresource,
womenhavetakenthelead.
PrimaveraDeFilippi,facultyassociateattheBerkmanCenteratHarvard
andapermanentresearcherattheNationalCenterofScientificResearchin
Paris,isatirelessadvocateofblockchaintechnologyandhasemergedasoneof
academia’sclearestandmosteloquentvoicesongovernance.Sheisorganizer,
instigator,andpromoterofdialoguewithintheecosystem.Withlawyer-turned-
entrepreneurConstanceChoi,anothervocalproponentintheindustry,DeFilippi
hasledaseriesofblockchainworkshopsatHarvard,MIT,andStanford,aswell
asinLondon,HongKong,andSydney.Theyhavebroughttogetherdiverse
stakeholdersfromtheindustryandbeyondtodebatebigissues.Nothingisoff
limits,andtheeventsoftenmashuppeopleofdifferentbackgrounds,
persuasions,andbeliefs.
ElizabethStarkisanotheremergingstaringovernance.TheYaleLaw
Schoolprofessorhastakenupthemantleofconvener-in-chieffortheindustry.
Likeanotherprominentwoman—DawnSong,MacArthurfellowandcomputer
scienceprofessoratBerkeley,andanexpertincybersecurity—Starkcomesfrom
adistinctlyacademicbackgroundbuthasotherambitions.SheorganizedScaling
Bitcoin,conveningdevelopers,industryplayers,thoughtleaders,government
officials,andotherstakeholdersinMontreal.A“constitutionalmoment”forthe
sector,ScalingBitcoinwascreditedwithclearinglogjamsintheblock-size
debate.Todaysheisalsoleadingasanentrepreneur,collaboratingonthe
developmentoftheBitcoinLightningNetworktosolvetheblockchain’s
scalabilityissue.
PerianneBoring,aformerjournalistandTVreporter,isthefounderofthe
ChamberforDigitalCommerce,atrade-basedassociationinWashington,D.C.
Withinayear,CDChasattractedahigh-profileboard(e.g.,BlytheMasters,
JamesNewsome,GeorgeGilder).Themovementneeded“bootsontheground
inWashingtontoopenadialoguewithgovernment,”shesaid.Withher
backgroundinjournalism,Boringfocusedonmessaging,positioning,and
polish.Herorganizationis“opentoanyonewhoiscommittedtogrowingthis
community,”shesaid,andisnowaleadingvoiceinpolicy,advocacy,and
knowledgeintheburgeoningblockchaingovernanceecosystem.
25
Thisgrowingchorusofleaderslobbyingforgovernanceisasprescientasit
isurgent.Whenwetalkaboutgoverningblockchaintechnology,wearenot
talkingaboutregulation,atleastnotexclusively.Forone,thereareserious
limitationstousingregulationsformanaginganimportantglobalresource.As
JoichiItosaid,“Youcanregulatenetworks,youcanregulateoperations,butyou
can’tregulatesoftware.”
26
Soregulationswillbeoneofseveralimportant
components.BlockchainisnotliketheInternetbecausemoneyisdifferentfrom
information.BlytheMasters,consummateWall-Street-insider-turned-
blockchain-pioneer,expressedherconcern:“Newcomersaresimplyabletodo
thingsthatregulatedinstitutionsarenotabletodo,butoneneedstothinkvery
carefullyaboutwhythoseregulationsexist,andwhatpurposetheyserve,before
onecanconcludethatexposingconsumerstounregulatedfinancialactivitiesisa
goodthing.”
27
Ultimately,thedebateisnotaboutthekindofsocietywewantbut
abouttheopportunitiesforleaderstostewardanimportantglobalresource.
ACAUTIONARYTALEOFBLOCKCHAINREGULATION
BenjaminLawsky,theformersuperintendentoffinancialservicesfortheState
ofNewYork(NYDFS),wasoncethemostpowerfulbankregulatorinthe
UnitedStates.ToWashingtoninsiders,Lawskywasknownforhisearlymorning
selfiesonhisdailyjogsaroundthecity.ButtothetitansofWallStreet,hewasa
gutsy,ambitious(nottomentionoverzealous)scrapperwhowouldroutinelytake
thefighttoanybankhethoughtwasmisbehavingandseekhisjustdeserts.
AppointedbyfriendandlongtimepoliticalallyGovernorAndrewCuomo,
Lawskywasthefirstevertoholdtheofficeoftopwatchdogofthestate’s
charteredbanks.In2012,onlyoneyearintothejob,hemadeheadlineswhen
NYDFSreacheda$340millionsettlementwithU.K.bankStandardChartered
PLCforitshandlingofmorethan$250millionintransactionsfromIran,
prohibitedatthetimebyU.S.andE.U.sanctions.Intheprocess,NYDFS
scoopedtheJusticeDepartment,whichwasseekingasimilarpenalty.
28
Tothose
whothoughtbankregulationsweretoolax,hewasthenewsheriffintown,a
fearlessleaderandreformerofanindustryrunamok.Tothebanks,hewas
quicklybecomingPublicEnemyNumberOne.Lawskywasjustgettingstarted.
Itwasmid-2013Lawskywasathisdesk,probablyworkingonanother
blockbustercaseagainstthebigbanks,whenaneconomistonhisstaffknocked
onhisdoortodiscusssomeunusualinquiries.Accordingtoafewlawyersonthe
street,severalclientfirmsweretransactinginsomestrangenewvirtualcurrency
calledbitcoin.Lawsky’sfirstreactionwas“Whattheheckisbitcoin?”
29
The
economistwentontoexplainthatthesecompanieshadcustomerswhowere
buying,selling,trading,andpayingforgoodsandserviceswiththisdigital
dollarandthatthelawyers,evercautious,wantedtoknowwhetherthiskindof
activityqualifiedasmoneytransmission,andifso,whattodoaboutit.InNew
York,moneytransmissionsaretypicallyregulatedatthestatelevel;andsothe
NYDFS,asthestateregulatorinNewYork,hadadutytoregulateanyentity
engagedinmoneytransmission.Buthow?Lawskyhadn’tevenheardaboutthe
technology,andhehadasneakingsuspicionthiswouldbeaverydifferentkind
ofchallenge.
Almostimmediately,Lawskywasconfrontedwithaproblemthathas
becomealltoocommonplace,thatdisruptivetechnologydoesnotfitneatlyinto
existingregulatoryboxes,ahallmarkofthedigitalage.Inhismind,bitcoin
didn’tfitatall.Bitcoinisglobalinreach;federalandstategovernmentswould
belimitedinthescopeofwhattheycandotogovernandregulateit.Moreover,
thetechnologyispeertopeeranddecentralized.Regulatorsmakealiving
monitoringlargeintermediaries.Theircentralizedledgerscontaintrovesofdata,
idealforbuildingcases.Andinthedigitalage,officialsingovernmentare
rarely,ifever,inpossessionofalltheinformationneededtomakedecisionsin
thepublicinterest.Often,theylackresourcestogoverniteffectivelyandcanbe
illinformedaboutinnovation.Lawskywascomingtotermswithsomethingthat
governmentsandregulatorsofdigitaltechnologieshadwrestledwithfortwenty
years.Thankstoluck,foresight,andadifferentregulatoryframework,the
Internetwasabletogrowandthrive.Cryptocurrencieswereanotherexampleof
howdigitaltechnologyiswrestingcontrolfromtraditionaldecisionmakers,
includinggovernments.
Still,Lawskyhadajobtodo.Uponreviewingtheexistingstatutes,hefound
themwoefullyinadequate.Thedepartmentinitiallywantedtoregulatethis
technologybyenforcingruleswrittenaroundthetimeoftheCivilWar.Those
moneytransmissionlawscouldn’tpossiblyaddressanykindofdigital
technologyliketheInternet,letalonedigitalcurrenciesorcybersecurity.“The
moreIlearned,themoreinterestedIgotinhowpowerfulthistechnologyis,and
Isawallthevariousapplicationsandplatformsthatweregoingtobebuilt,over
time,”hesaid.Ifhe“couldgetregulationright,tomakesurethebadstuffwe
didn’twanttoseehappeningintheecosystemwasavoided,andatthesametime
nothaveregulationbetoooverbearing,thenwehadarealchanceofhelpinga
verypowerfultechnologymakeseriousimprovementstooursystem.”
30
Lawsky
concluded,“Maybeweneedanewtypeofregulatoryframeworktodealwith
somethingthatisjustqualitativelydifferent?”
31
Hisproposal,theBitLicense,
wasthefirstseriousattempttoprovidearegulatorylensontothisindustry.A
controversialpieceoflaw,itrevealedhowevenwell-intentionedregulationscan
produceunintendedconsequences.WhentheBitLicensewentintoeffect,there
wasamassexodusofcompaniessuchasBitfinex,GoCoin,andKrakenfrom
NewYork;theycitedtheprohibitivecostofthelicenseasamaincause.Thefew
thatstayedarewell-capitalizedandmorematurebusinesses.
Thebenefits,suchasimprovedoversightandconsumerprotection,are
significant.Licensedexchanges,suchasGemini,havegainedground,perhaps
becausetheirinstitutionalclienteleknowthey’renowasregulatedasbanks.But
withfewercompetitors,willtheBitLicensestifleinnovationandcripplegrowth?
BritoarguedthattheBitLicensemissesthemarkbyapplyingoldsolutionsto
newproblems.HecitedtheBitLicenserulethatifyoutakecustodyofconsumer
funds,youneedtogetalicense.“Withsomethinglikebitcoinandotherdigital
currencies,youhavetechnologieslikemultisig[multisignature]that,forthefirst
time,introducetheconceptofdividedcontrol.Soifthethreeofuseachhavea
keytoamultisigaddressthatneedstwooutofthree,whohascustodyofthe
funds?”
32
Inthiscase,theconceptofcustody,onceveryclearinthelaw,isnow
ambiguous.
“Mybeliefisthenextfivetotenyearswillbeoneofthemostdynamicand
interestingtimesinhistoryforourfinancialsystem,”Lawskysaid.
33
Heresigned
fromNYDFStokeepworkingonimportantissuesattheheartofthisdynamic
environment.“IwouldenjoymycareerifIgottospendmytimeworkinginthe
middleofwhatIbelieveisgoingtobeanenormouslytransformative,dynamic,
interestingtime...youhavethisworldoftechnology,whichisusuallylargely
unregulated,collidingwithprobablythemostregulatedsystemintheworld,the
financialsystem.Noonereallyknowswhatcomesofthatcollision,”hesaid.
“It’sallgoingtoworkoutoverthenextfivetotenyearsandIwanttobeinthe
middleofthatcollision.”
34
THESENATORWHOWOULDCHANGETHEWORLD
TheCanadianSenatesurprisedmanywhen,inJune2015,itsCommitteeon
Banking,Trade,andCommercereleasedanunambiguouslypositiveand
thoughtfulreport,“DigitalCurrency:YouCan’tFlipThisCoin.”
35
Incorporating
feedbackfrommultiplestakeholdersintheblockchainecosystem,thereport
detailedwhygovernmentsshouldembraceblockchaintechnology.
36
ThiscouldbethenextInternet,”saidDougBlack,theCanadiansenator
fromCalgary,Alberta,andamajorcontributortothereport.“Thiscouldbethe
nextTV,thenexttelephone.WewanttosignalbothwithinandoutsideCanada,
wesupportinnovationandentrepreneurship.”
37
LikeBenLawsky,Blackisa
veteranlawyer.Hemadehiscareerinthecountry’soilpatch,workingonbehalf
ofoilandgasproducersasapartneratoneofthecountry’smostprestigiouslaw
firms.SenatorBlackdiffersfromMr.Lawsky,however,inhisreluctancetorush
newregulationsoutthedoor.“Governmentshouldgetoutoftheway!”Black
toldus.
38
AsmembersoftheCanadianSenate,SenatorBlackandhiscolleagues
havenoformallegislativerole,butcanmovetheneedleonimportantissuesby
issuingguidanceormakingrecommendationstothegovernment.Still,withan
averageageofsixty-six,theCanadianSenatewouldn’tbetheodds-onfavorite
toembracethiscutting-edgetechnology.Butthat’sexactlywhattheydid.
Reflectingontheprocess,Blackrecalledthinking,“Howdowecreatean
environmentthatencouragesinnovationasopposedtostiflesinnovation?...
That’sunusualforagovernmenttotakethatpointofviewfromtheget-go.”
AccordingtoBlack,governments“tendtobeconcernedaboutmaintaining
controlandminimizingrisk.”
39
Whileacknowledgingtheriskanynew
technologyposestoconsumersandbusinessalike,Blackexplained,“There’s
riskinanything;there’sriskinfiatcurrency.Wecanmanageriskatsomelevel,
butlet’salsocreateanenvironmentwhereinnovationcanbefostered.”
40
With
thisreport,Blackbelievesthey’vehitthemark.
Thereportmakesanumberofrecommendations,buttwostandout.First,
thegovernmentshouldstartusingtheblockchaininitsinteractionswith
Canadians.Blacksaid,“Theblockchainisamoreconfidentialvehicletoprotect
data”;therefore,“governmentshouldbelookingtostartutilizingthis
technology,whichwouldbeapowerfulmessage.”
41
Thisisapowerful
statement:ifyouwanttobethehubforinnovationandapioneerinthesector,
putyourmoneywhereyourmouthis,andstartinnovatingyourself.
Thesecondrecommendationisperhapsevenmoresurprising:the
governmentshouldtakealighttouchonregulation.Anumberofrespected
figuresinthelegalprofessionwhofocusonblockchaintechnologyhavemade
thisargument.AaronWrightofCardozoSchoolofLaw,YeshivaUniversity,
advocatesfor“safeharbor”lawsthatallowinnovatorstokeepinnovatingwhile
minimizinggovernmentregulationsuntilthetechnologymatures.
42
Josh
Fairfield,ofWashingtonandLeeUniversityLawSchool,said,“Weneed
regulationsthatactliketechnology—humble,experimental,anditerative.”
43
CENTRALBANKSINADECENTRALIZEDECONOMY
Financemaybethesecond-oldestprofession,butcentralbankingisarelatively
modernphenomenon.TheU.S.FederalReserve(theFed),theworld’smost
powerfulcentralbank,celebrateditscentennialin2013.
44
Centralbanks,intheir
relativelyshorthistory,havegonethroughmultiplereincarnations,thelastonea
bigshiftfromthegoldstandardtoafloating-ratesystemoffiatcurrencies.
Becausedigitalcurrencieschallengetheroleofcentralbanksinaneconomy,we
mightexpectcentralbankerstoopposeblockchaintechnology.However,over
theyears,thesebankershaveshownawillingnesstoinnovate.TheFed
pioneeredelectronicclearingoffundsbychampioningtheAutomatedClearing
House(ACH)systemwhenallchecksweresettledandclearedmanually.Like
centralbankselsewhere,theFedhassavoredexperimentation.Ithasembraced
unorthodoxanduntestedpolicies,mostfamously(orinfamously)the
quantitativeeasingprograminthewakeofthe2008financialcrisis,whenitused
newlymintedmoneytobuyfinancialassetssuchasgovernmentbondsatan
unprecedentedscale.
Notsurprisingly,centralbankershavebeenforwardthinkingin
understandingblockchaintechnology’simportancetotheirrespective
economies.Therearetworeasonsforthisleadership.First,thistechnology
representsapowerfulnewtoolforimprovingfinancialservices,potentially
disruptingmanyfinancialinstitutionsandenhancingtheperformanceofcentral
banksintheglobaleconomy.
Second,andthisisthebigone,blockchainraisesexistentialquestionsfor
centralbanks.Howdotheyperformtheirroleeffectivelyinaglobalmarketwith
oneormanycryptocurrenciesoutsidetheircontrol?Afterall,monetarypolicyis
akeyleverinacentralbankerstoolboxtomanagetheeconomy,particularlyin
timesofcrisis.Whathappenswhenthatcurrencyisnotissuedbyagovernment
butexistsgloballyaspartofadistributednetwork?
Centralbankerseverywhereareexploringthesequestions.CarolynWilkins,
deputygovernoroftheBankofCanadaandacentralbankingveteran,toldus,
“Weareconfidentinourparadigmrightnow,butweunderstandmany
paradigmshaveashelflife:they’regoingtoworkwellforanumberofyears
andthenthingsaregoingtostarttogowrong.Youcanfixitatthemarginfirst,
buteventuallyyoujustneedtoswitchtosomethingelse.”Shebelievesthe
blockchaincouldbethatsomethingelse.“It’shardnottobefascinatedby
somethingsotransformative.Thistechnologyisbeingusedinwaysthathave
implicationsforcentralbankingthatspanallthefunctionsthatwehave,”she
said.
45
BenBernanke,formerchairoftheFed,saidin2013thatblockchain
technologycould“promoteafaster,moresecure,andmoreefficientpayment
system.”
46
Today,boththeFedandtheBankofEngland(andlikelyothercentral
bankerswhohavenotbeenasvocal)haveteamsdedicatedtothistechnology.
Tounderstandwhycentralbanksaresointerested,let’sfirstaddresswhat
centralbanksdo.Broadlyspeaking,theseaugustinstitutionsperformthreeroles.
First,theymanagemonetarypolicybysettinginterestratesandcontrollingthe
moneysupplyandinexceptionalcircumstancesbyinjectingcapitaldirectlyinto
thesystem.Second,theyattempttomaintainfinancialstability.Thismeansthey
actasthebankerforgovernmentandforthebanksinthefinancialsystem;they
arethelenderoflastresort.Finally,centralbanksoftensharetheresponsibility
withothergovernmententitiesofregulatingandmonitoringthefinancial
system,particularlytheactivitiesofbanksthatdealwithsavingsandloansto
averageconsumers.
47
Invariably,alloftheserolesareintertwinedand
codependent.
Let’sstartwithfinancialstability.“Asacentralbank,ourroleisasa
liquidityprovideroflastresort.WedothatinCanadiandollars.Therefore,
CanadiandollarsareimportantasasourceofliquidityfortheCanadianfinancial
system,”Wilkinssaid.Whatiftransactionsareinanothercurrencylikebitcoin?
“Ourabilitytoprovidelenderoflastresortserviceswouldbelimited.”
48
The
solution?Centralbankscouldsimplybeginholdingreservesinbitcoin,asthey
doinothercurrencies,andassetssuchasgold.Theycouldalsorequirefinancial
institutionstoholdreservesatthecentralbankinthesenonstatecurrencies.
Theseholdingswouldenableacentralbanktoperformtheirmonetaryrolein
bothfiatandcryptocurrencies.Soundsprudent,right?
Whenconsideringfinancialstabilityrelativetomonetarypolicy,Wilkins
said,“Theimplications[formonetarypolicy]ofelectronicmoneydependon
howit’sdenominated.”Shesuggestedinarecentspeechthat“e-money,”asshe
calledit,couldbedenominatedbyagovernmentinanationalcurrencyorasa
cryptocurrency.
49
AdigitalcurrencydenominatedinCanadiandollarswouldbe
easytomanage,shesaid.Ifanything,itwouldhelpacentralbanktorespond
morequickly.Mostlikely,wewillseeacombinationofthetwo:centralbanks
willholdandmanagealternativeblockchain-basedcurrenciesastheydoforeign
reservesandwillexploreconvertingfiatcurrencytoso-callede-moneythrough
ablockchain-basedledger.Thisnewworldwilllookalotdifferent.
Whataboutcentralbanksasregulatorsandwatchdogs?Theyhave
considerableregulatorypowerintheirrespectivecountries,buttheydonot
operateinsilos.Theycoordinateandcollaboratewithothercentralbanksand
withglobalinstitutionsliketheFinancialStabilityBoard,theBankfor
InternationalSettlements,theInternationalMonetaryFund,theWorldBank,and
others.Weneedstrongerglobalcoordinationtoaddressblockchainissues.
Today,centralbankersareaskingimportantquestions.CarolynWilkinssaid,
“It’seasytosaythatregulationshouldbeproportionatetotheproblem,butwhat
istheproblem?Andwhataretheinnovationsthatwewant?”
50
Thesearegreat
questionsthatwecouldaddressmoreeffectivelyinaninclusiveenvironment.
BrettonWoodsisagoodmodel.Howaboutasecondmeetingoftheminds,
notconductedinsmokyroomsbehindcloseddoors,butinanopenforumwhere
variousstakeholders,includingtheprivatesector,thetechnologycommunity,
andgovernanceinstitutionscouldparticipate?Wilkinssaid,“TheBankof
Canadaworkswithothercentralbanksonunderstandingthistechnologyand
whatitmeans.We’vehadconferencesthatinvitedavarietyofcentralbanksand
academicsandpeoplefromtheprivatesector.”
51
Indeed,thestoryofcentralbanksrevealsabiggerissue:governmentsoften
lacktheknow-howtorespondinafast-changingworld.Centralbankers
certainlyhaveviewsthatmatterprofoundlytothisdiscussion,buttheyshould
looktootherstakeholdersinthenetworkandothercentralbanksgloballyto
shareideas,collaborateonsubstantiveleadershipissues,andmovetheagenda
forward.
REGULATIONVERSUSGOVERNANCE
Tobesure,valueandmoneyaredifferentfromtraditionalinformation.We’re
talkingaboutsavings,apension,aperson’slivelihood,hercompany,herstock
portfolio,hereconomy,andthataffectseveryone.Don’tweneedregulation,and
fast?Canandshouldgovernmentshowrestraintinthefaceoftheseismicshifts
tocome?
Importantshiftsarerevealingthelimitsofgovernmentinanageof
acceleratinginnovation.Forexample,the2008financialcrisisshowedhowthe
speedandcomplexityoftheglobaleconomicsystemrenderstraditional
centralizedrulemakingandenforcementincreasinglyineffective.Butstronger
regulationisn’ttheantidote.Governmentscannothopetooverseeandregulate
everycornerofthefinancialmarket,technology,ortheeconomy,becausethere
aresimplytoomanyactors,innovations,andproducts.Ifanything,the
experienceillustratesthatgovernmentscanatleastforcetransparencytoshed
lightonbehaviorandcreatechange.Governmentscandemandthattheactions
ofbanks,forexample,betransparentontheWebandletcitizensandother
partiescontributetheirowndataandobservations.Citizenscanevenhelp
enforceregulations,too,perhapsbychangingtheirbuyingbehavioror,armed
withinformation,byorganizingpubliccampaignsthatnameandshame
offenders.
Ofcourse,governmentsmustbekeystakeholdersandleadersingovernance.
Theymustalsoacknowledgethattheirroleingoverningtheblockchainwillbe
fundamentallydifferentfromtheirhistoricalroleinmonetarypolicyand
financialregulation.Formillennia,stateshavehadamonopolyonmoney.What
happenswhen“money”isnotissuedexclusivelybyacentralauthoritybut
insteadis(atleastinpart)createdbyadistributedglobalpeer-to-peernetwork?
Whilegenerallypositive,theU.S.responsehasseemedattimes
contradictory.“IntheU.S.thereisarealizationfromCongresstotheexecutive
branchtodifferentagenciesincludinglawenforcementthatthistechnologyhas
serious,legitimateuses,”saidJerryBrito.
52
Indeed,theInternethasshownus
that,bytemperamentandinstitutionaldesign,theUnitedStatesnotonly
toleratesbutwelcomesinnovationsthatpushtheboundaries.Italsofencesoff
innovationthroughregulations—someofwhichmaybemisguidedandare
almostcertainlypremature.
Therisksofregulatingprematurely—beforefirmlygraspingtheimplications
—canhaveprofoundconsequences.DuringVictorianeraEngland,so-called
self-drivinglocomotives(i.e.,automobiles)weremandatedbylawtobe
accompaniedbyamanwalkinginfrontwavingaredflagtoalertbystandersand
horsesofthecomingarrivalofthisstrangecontraption.SteveBeauregard,CEO
ofGoCoin,aleadingcompanyintheindustry,describedthepitfallsofregulating
toosoon:“WhenWebpageswerefirstgoingup,regulatorsweretryingto
determinewhatregulatoryregimetheyshouldbelongunder.Oneideasurfaced
requiringpeoplewhobuiltandhostedWebsitestogetacitizen’sbandradio
licensebecauseyou’rebroadcasting.CanyouimaginehavingtohaveaCBradio
licensesoyoucouldputaWebsiteup?”
53
Thankfully,thisnevercametopass.
Let’sbeclear:regulationdiffersfromgovernance.Regulationisaboutlaws
designedtocontrolbehavior.Governanceisaboutstewardship,collaboration,
andincentivestoactoncommoninterests.Butexperiencesuggestsgovernments
shouldapproachregulatingtechnologiescautiously,actingasacollaborative
peertoothersectorsofsociety,ratherthanastheheavyhandofthelaw.They
mustparticipateasplayersinabottom-upgovernanceecosystemratherthanas
enforcersofatop-downregimeofcontrol.
BritoofCoinCenterarguedthereisaroleforgovernments,buttheyshould
exercisecaution.Headvocatesforamultistakeholdersolution,whichstartswith
education:“briefingfolksinCongress,attheagencies,inthemedia,and
answeringanyoftheirquestionsorputtingthemintouchwiththepeoplewho
canintelligentlyanswertheirquestions.”
54
ANEWFRAMEWORKFORBLOCKCHAINGOVERNANCE
Ratherthansimplyregulating,governmentscanimprovethebehaviorof
industriesbymakingthemmoretransparentandboostingcivicengagement—
notasasubstituteforbetterregulationbutasacomplementtotheexisting
systems.Webelieveeffectiveregulationand,byextension,effectivegovernance
comefromamultistakeholderapproachwheretransparencyandpublic
participationarevaluedmorehighlyandweighmoreheavilyindecision
making.Forthefirsttimeinhumanhistory,nonstate,multistakeholdernetworks
areformingtosolveglobalproblems.
Inrecentdecades,twomajordevelopmentshaveprovidedthebasisfora
newmodel.First,theadventoftheInternethascreatedthemeansfor
stakeholdersofallsizes,downtoindividuals,tocommunicate,contribute
resources,andcoordinateaction.Wenolongerneedgovernmentofficialsto
convenefortherestofustoalignourgoalsandefforts.Second,businesses,
academia,NGOs,andothernonstatestakeholdershavegainedtheabilitytoplay
animportantroleinglobalcooperativeefforts.Therewerenobusinesses,NGOs,
ornonstatestakeholdersatthetableatBrettonWoods.Today,thesestakeholders
routinelyengagewithgovernmentstoaddressissuesinallfacetsofsociety—
fromthegovernanceofaglobalresourceliketheInternettoaddressingglobal
problemslikeclimatechangeandhumantrafficking.
Thecombinationofthesedevelopmentsenablesthenewmodel.Fora
growinglistofglobalchallenges,self-organizingcollaborationscannowachieve
globalcooperation,governance,andproblemsolving—andmakefaster,stronger
progressthantraditionalstate-basedinstitutions.
Inconsideringthefoundationforablockchaingovernancenetwork,wepose
anumberofcriticalquestionsanddevelopaframeworkforansweringthem:
Howdowedesignsuchagovernancenetwork?
Dowecreateanewnetworkfromscratchorbuildaroundanexisting
institutionthatalreadyhasaconstituencythatdealswithinternational
financialissues?
Whatwillbethemandateforthisnetworkandwillithavethepowerto
implementandenforcepolicy?
Inwhoseinterestswillablockchaingovernancenetworkactandto
whomisitaccountable?
Andcritically,willnation-statesactuallycedeanyauthoritytoaglobal
network?
Overall,theecosystemthatgovernstheInternetisrichwithlessons.Thatit
hasbecomeaglobalresourceinsoshortatimeisastounding,innosmallpart
thankstostrongleadershipandgovernanceanddespitethepowerfulforces
againstit.
Sowhogovernsthefirst-generationInternetandhow?Avastecosystemof
companies,civilsocietyorganizations,softwaredevelopers,academics,and
governments,namelytheU.S.government,inanopen,distributed,and
collaborativemannerthatwecannotmeasurebytraditionalcommand-and-
controlhierarchiesandframeworks.Nogovernmentsorgroupofgovernments
controltheInternetoritsstandards,thoughseveralU.S.governmentagencies
oncefundedit.
55
IntheearlydaysoftheInternet,governmentsshowedbothrestraintand
foresight.Theyshowedrestraintbylimitingregulationandcontrolthroughout
theInternet’sevolutionandtheyshowedforesightbyallowingtheecosystemto
flourishbeforetryingtoimposerulesandregulations.Thismultistakeholder
networkworkedfortheInternet,butweneedtorecognizethattherewillbea
greaterroleforregulationofblockchaintechnologies.WhereastheInternet
democratizedinformation,theblockchaindemocratizesvalueandcutstothe
coreoftraditionalindustrieslikebanking.Clearlytherewillbearegulatoryrole
toensurethatconsumersandcitizensareprotected.Yetourresearchsuggests
thattheInternetgovernancemodelisagoodtemplate.
Questionspersistoverhowmuchnewleadershipwillcomefromtheold
Internetgovernancecommunity.VintCerf,whocoinventedtheInternetitself
andledthecreationoftheInternetSocietyandtheInternetEngineeringTask
Force,whichhascreatedvirtuallyalltheimportantInternetstandards,suggested
thatagoodstartingpointforblockchainwouldbetocreateaBOF(Birdsofa
Feather)interestgroupwithintheIETF.
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Initially,manyorganizationsinvolved
inInternetgovernancevieweddigitalcurrenciesandblockchaintechnologiesas
outsidetheirpurview,butthatischanging.TheWorldWideWebConsortium,
W3C,hasmadeWebpaymentsapriority,andblockchainiscentraltothat
discussion.
57
Additionally,theInternetGovernanceForum(IGF)hashosted
sessionsaboutblockchainandbitcoin,whereparticipantshaveexplorednew
decentralizedgovernanceframeworksenabledbythistechnology.
58
Boundaries
betweenoldandnewarefluid,andmanyleadersintheInternetgovernance
network,suchasPindarWong,theInternetpioneer,formervice-chairofICANN
andtrusteeoftheInternetSociety,havebeenthemosteffectiveleadersin
blockchaingovernanceaswell.
59
Whatdoesthenewgovernancenetworklooklike?Therearetentypesof
GSNs.Eachinvolvessomecombinationofcompanies,governments,NGOs,
academics,developers,andindividuals.Noneofthemarecontrolledbystatesor
state-basedinstitutionsliketheUN,IMF,WorldBank,ortheG8.Allwillplay
animportantroleintheleadershipandgovernanceofblockchaintechnology.
1.KnowledgeNetworks
Theprimaryfunctionofknowledgenetworksistodevelopnewthinking,
research,ideas,andpoliciesthatcanhelpsolveglobalproblems.Moreinformed
andsavvyuserscanbetterprotectthemselvesfromfraudandtheftandprotect
theirprivacy.Theycanalsorealizethefullvalueofthisdisruptivetechnology,
creatingopportunitiesforagreatershareinglobalprosperityandgreater
financialconnectivity.
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Knowledgenetworksmustfosteracultureofopenness
andinclusion,betransparent,andinvolvemultiplestakeholders.
BlockchainImplications:Knowledgenetworksaretheoriginationpoints
fordisseminatingnewideastootherGSNsandthebroaderworld.Theyarethe
keytoavoidingpitfallsandshowstoppers.Knowledgewillpreparestakeholders
toadvocatemoreeffectively,createorcocreatepolicy,andspreadcritical
informationtousers.Knowledgesharinginstigatesafruitfuldialoguewith
government.AccordingtoJerryBritoofCoinCenter,whatevertheparticular
policyissueis,ifgovernments“don’tunderstandthetechnologyanddon’t
understandtheimplications,they’resettingthemselvesupforfailure.”
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Many
voicetheneedtocreatespacesforideasandinformationtobesharedand
debated.“Thereshouldbeaforumtopresentproposalsorideas,”Tyler
Winklevosssaid.
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MIT’sDigitalCurrencyInitiativeisaleadingknowledge
network,tryingtouniteandexciteacademicsanduniversitiesglobally.Below
theradar,informalmeetups,liketheSanFranciscodevelopermeetupandthe
NewYorkdevelopermeetup,arealsomakingknowledgeapriority.
Blockchainworkshops.orgisanothergroupthathasconvenedstakeholdersto
spreadknowledgeandkeylessons.Reddit,theonlineforumandcommunity,is
alsoabreedinggroundfornewknowledgeinthespace.
2.DeliveryNetworks
Thisclassofnetworksactuallydeliversthechangeitseeks,supplementingor
evenbypassingtheeffortsoftraditionalinstitutions.Forexample,ICANN
performsanessentialroleintheInternetgovernancenetwork,delivering
solutionsintheformofdomainnames.
BlockchainImplications:Howdoweensurethattheincentivesare
adequatefordistributedmasscollaboration,makingthetechnologyreadyfor
primetime?Wewilllikelyhavean“ICANNmoment”forblockchain,where
organizationswillformtodeliveressentialfunctions.However,whereasICANN
andmanyotherGSNtypesintheInternetgovernancenetworkaredistinctly
American,blockchainleadersshouldpushtomaketheseorganizations
international.JoichiItosaid,“Idothinkthere’salreadyabigpushtomake
governancenon-Americanandinternationalfromthebeginningbecausethat’s
onethingwelearnedfromICANN,thatit’shardtogetoutfromunderAmerica
onceyougetstartedaspartofAmerica.”
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TheCoalitionforAutomatedLegal
Applications(COALA)isaglobalorganizationthatperformsafewkeyroles:It
disseminatesknowledge,influencespolicy,andadvocatesforblockchain
technology,andsupportsthedevelopmentanddeploymentofblockchain-based
applications,allcriticaltoovercomingmajorpotentialshowstoppers.
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3.PolicyNetworks
Sometimesnetworkscreategovernmentpolicy,eventhoughtheymayconsistof
nongovernmentalplayers.Policynetworkssupportpolicydevelopmentorcreate
analternativeforpolicy,whethergovernmentssupportthemornot.Thegoalof
policynetworksisnottowrestcontrolofthepolicy-makingprocessfrom
governments.Instead,theirgoalistoturndecisionmakingfromthetraditional
hierarchicalbroadcastmodeltooneofconsultationandcollaboration.
BlockchainImplications:Today,anascentpolicynetworkisemerging.
CoinCenter,anot-for-profitpolicygroupinWashington,D.C.,focusesonfive
coreverticals:innovation,consumerprotection,privacy,licensing,and
AML/KYC(anti–moneylaundering/knowyourcustomer).TheChamberof
DigitalCommerce,atradeorganization,focusesonpromotingtheacceptance
anduseofdigitalcurrencies.
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TheUnitedKingdomhasitsownDigital
CurrencyAssociation,asdoAustraliaandCanada,thatspeaksforindustry.With
thehiringofJohnCollins,aformersenioradvisertotheU.S.government,
Coinbasebecamethefirstcompanytoinstallapermanentpolicyadvocate.
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Promotingandunitingmanystrongvoicesinthepolicyarenawillensurethat
blockchainhasabetterchanceoffulfillingitspotential.Forexample,weknow
miningconsumesalotofenergyandthatclimatechangeisabigproblem.
Responsiblepolicywillgoalongwaytowardbuildingasustainablefuture,and
governmentcan’tdoitalone.
4.AdvocacyNetworks
Advocacynetworksseektochangetheagendaorpoliciesofgovernments,
corporations,andotherinstitutions.TheInternethasloweredthecostof
collaboration,andtodaytheworldiswitnessingthedramaticriseofincreasingly
powerfuladvocacynetworksthataremoreglobal,widelydistributed,and
technologicallysophisticatedthananythingwe’veseen.
BlockchainImplications:Advocacynetworksarisewiththe
disillusionmentwithtraditionalpoliticalandcivicinstitutions,makingthema
logicalfitfortheblockchaincommunity,whichistryingtoupendhowthose
traditionalinstitutionssolveproblems.However,intheseearlydays,advocacy
networksmustworkwithgovernmentasapartner.Advocacynetworksare
closelytiedtopolicynetworks,soit’sunsurprisingthatCoinCenterandthe
ChamberofDigitalCommercearetakingtheleadinthisarea.Wecouldalso
includehereCOALA,MIT’sDigitalCurrencyInitiative,andothers.Advocacy
iscriticaltoscalingblockchaintechnology.Intheabsenceofstrongadvocates
whostandupforstakeholdersandstakeholderrights,governmentsandother
powerfulinstitutionscouldtrytostifle,twist,orusurpthispowerfulopen
networktotheirexclusiveadvantage,anotherdangerouspotentialshowstopper.
5.WatchdogNetworks
Thesenetworksscrutinizeinstitutionstoensurethattheybehaveappropriately.
Topicsrangefromhumanrights,corruption,andtheenvironmenttofinancial
services.Intheprocess,theydrivepublicdebate,boosttransparency,andignite
movementsforchange.Theroleofwatchdogsisinherentlyintertwinedwiththat
ofadvocacynetworksandpolicynetworks.Policynetworkscollaboratewith
governmenttoshapepolicythatworks.Watchdogsensurethatindustrycomplies
withpoliciesandeffectivelymonitorsandenforcescompliance.Governments
thatabusethepublictrustcanalsobescrutinizedandheldaccountable.
BlockchainImplications:TheBlockchainAllianceisapartnershipbetween
lawenforcement,NGOs,tradeorganizations,andtheprivatesectorandisthe
firsttrueadvocacynetworktoforminthespace.CoinCenterandtheChamber
ofDigitalCommerce,withsupportfromBitFury,Bitfinex,BitGo,Bitnet,
Bitstamp,Blockchain,Circle,Coinbase,andothers,havepartneredwithlaw
enforcementagenciessuchastheU.S.JusticeDepartment,theFBI,theSecret
Service,andtheDepartmentofHomelandSecurity.Aswehighlightedinthe
previouschapter,blockchainbeingco-optedbycriminalsonawidespreadscale
isashowstopper.Thesewatchdogshaveanimportantadvocacyroleaswell.In
theaftermathoftheParisterroristattacks,someEuropeanlawmakers,
regulators,andlawenforcementblamedbitcoinasthesourceofterrorism
financing.TheBlockchainAlliancecalledforpatience:Let’snotregulateoutof
fear,
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theysaid.Asofthiswriting,wedon’tknowhoweffectivetheywere,but
surelyintheirabsencethingswouldhaveturnedoutworse,withgovernment
approachingthejobunilaterally.Otherthantheself-policingroleofcommunity
memberswhoconvene,collaborate,anddebateonforumsandonReddit,few
otherwatchdognetworkshavesteppedup.Partnershipswithlawenforcement
areahelpfulstart,buttheblockchainecosystemneedsfullyindependent
organizations,perhapsliketraditionalwatchdogssuchasAmnestyInternational
andHumanRightsWatch,tomonitorgovernments,corporations,andotherlarge
institutions.Otherwise,weriskfallingvictimtoanothershowstopper:that
blockchainbecomesanewandpowerfulsurveillancetoolusedbycorruptand
unscrupulousgovernments.
6.Platforms
Thedigitalageallowedorganizationstobemuchmorethanclosed,siloed
institutions;theycanalsobeplatformsforvaluecreation,innovation,andglobal
problemsolving.OrganizationslikeChange.orgempowerindividualstoinitiate
campaignsinsupportofsocialcausesfromhumanrightstoclimatechange.A
“petitionplatform”harnessesthecollectiveforceofmillionsofpeopleand
catalyzestheirpassionintolastingimpact.Opendataplatformscanapplyto
manyissues—fromclimatechangetotheblockchain.
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BlockchainImplications:Asblockchaintechnologygainsinsystemic
importance,stakeholdersmustaggregateandscrutinizedata.Thebitcoin
blockchainmayberadicallyopen,transparent,andreconcilable,butclosed
blockchainsusedineverythingfromfinancialservicestotheInternetofThings
mightnotbe.Imagineaplatformthatallowedregularcitizenstoaggregateand
scrutinizedata,provingastrongbulwarkagainstcreepingshowstoppersof
scalability,governmentencroachment,orunsustainableenergyuse.Theywould
enablewatchdogsandadvocatesamongustoholdinstitutionsandcorporations
moreaccountableanddriveconstructivediscussion.
7.StandardsNetworks
Standardsnetworksarenon-state-basedorganizationsthatdeveloptechnical
specificationsandstandardsforvirtuallyanything,includingstandardsforthe
Internetitself.Theydeterminethestandardsthatformthefundamentalbuilding
blocksforproductdevelopmentandallowapromisinginnovationtomakethe
leaptomassadoption.Forglobalstandardsnetworkstowork,theymustengage
theexpertiseofindividuals,institutions,civilsocietyorganizations,and,mostof
all,privatesectorenterprise.TheInternetEngineeringTaskForce,oneofthe
primarystandardsbodiesfortheInternetgovernancenetwork,excelsat
incorporatingthemanyviewsofdiversestakeholders.
BlockchainImplications:Originally,theBitcoinFoundationfunded
developmentofthebitcoincoreprotocol,thecommonstandardsusedbythe
community.However,thenear-collapseofthefoundation(precipitatedby
mismanagementandwaste)provedtheneedfornetworkedgovernance
solutions.Recognizingtheprofoundimportanceofthistechnologyandtheneed
forcarefulstewardshipandnurturing,MITcreatedtheDigitalCurrency
Initiative,whichhassincebankrolledthebitcoincoredeveloperssotheycan
continuetheirwork.“Westeppedinimmediatelyandprovidedthemwith
positionsattheMITmedialab,sotheycouldcontinuetoindependentlyworkon
supportingthecoredevelopmentofbitcoin,”saidBrianForde.
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Forthecore
developers,theirabilitytoworkautonomouslywascentraltothedesign.
GavinAndresenisamongthecoredevelopersworkingatMIT.Hebelieves
leadershipisrequiredtomovetheagendaforwardoncommonstandards,such
asthemuch-debatedblock-sizequestion.“Maybeyoucandesignlightsocketset
wavesbycommittee,butyoucan’tdesignsoftwarestandardsthatway,”he
suggested.PointingtotheearlydaysoftheWeb,Andresensaid,“TheInternet
modelshowsthatyoucanhavetechnologieswhereconsensusdoesarise,even
thoughthere’snooneclearleader,”butthat“youcaneitherhaveapersonora
processthatendsinaperson.Youdefinitelyneedoneortheother.”
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Consensus
mechanismsalonecan’tsupportstandardsdevelopments.
Scalingbitcoin.orgisanorganizationthatconvenesengineersandacademics
toaddressmajortechnicalissues,includingstandardsquestions.PindarWong,
whochairstheplanningcommitteeforScalingbitcoin.org(amonghismany
otherimportantleadershiproles),hasbeenakeyleaderinconveningkey
stakeholdersandclearingtechnicallogjamsinthesector.Infinancialservices,
bothR3andtheHyperledgerProjectaretacklingcriticalstandardsissues.
Invariably,therewillhavetobestandardsnetworksonavarietyofthings,from
theblockchainprotocolthatformsthebasisofthefinancialservicesindustryof
thefuture,tocommonstandardsforprivacyandpaymentsintheInternetof
Things.
Whileeachofthesegroupsattackstheproblemfromdifferentanglesand
withdifferentagendas,eachsharesacommongoaltomakethistechnology
readyforprimetime—bybuildinginfrastructure,developingstandards,and
makingitscalable.
8.NetworkedInstitutions
Somenetworksprovidesuchawiderangeofcapabilitiesthatwedescribethem
as“networkedinstitutions.”Theyarenotstate-basedbuttruemultistakeholder
networks.Thevaluetheygeneratecanrangefromknowledge,advocacy,and
policytoactualdeliveryofsolutions.
BlockchainImplications:TheWorldEconomicForum(WEF),aleading
networkedinstitution,hasbeenavocalproponentofblockchaintechnology.The
blockchainwasfrontandcenteratDavosinJanuary2016.JesseMcWaters,
financialinnovationleadattheWEF,believesblockchaintechnologyisa
general-purposetechnology,liketheInternet,whichwecanusetomakemarkets
radicallymoreefficientandimproveaccesstofinancialservices.TheWEF
predictedthatwithinadecade,wecouldstore10percentofglobalGDPon
blockchains.
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Asanorganization,theWEFhaschampionedandadvancedbig
issues,suchasincomeinequality,climatechange,andevenremittances.Other
networkedinstitutions,fromthesmallestgroupstothebiggestfoundationsinthe
world,suchastheClintonFoundationandtheBillandMelindaGates
Foundation,wouldbewisetochampionthistechnologytoadvancesuchbig
issuesasfinancialinclusionandhealthcaredelivery.Networkedinstitutions
oftenhavearoletoplayininfluencinggovernmentpolicymaking,makingthem
acriticallinkandstrategicpartnerinovercominganumberofmajor
showstoppers.
9.Diasporas
Diasporasareglobalcommunitiesformedbypeopledispersedfromtheir
ancestrallandsandunitedbycultureandidentitywiththeirhomeland.Thanksto
theInternet,thesepeopleandaffiliatedorganizationscancollaboratein
multistakeholdernetworks.Oneofthefunctionsofmanyoftoday’sdiasporasis
toaddressandhelpsolvecommonglobalproblems.
BlockchainImplications:Diasporasarecriticaltoblockchain’sfuture.For
one,blockchainmakestheprocessofsendingremittancessimpleandaffordable.
Farfrombeingajobkiller,blockchainactuallycreatestimeandresourcesfor
thesepeopletopursueotherwage-earningopportunitiesorentrepreneurial
endeavors.Whileafewcompanieshaveoriginatedinplacessuchasthe
PhilippinesandKenya,diasporasmustdomoretoaccelerateknowledge,
adoption,andacceptanceofblockchainpaymentmethods.Today,themajorityof
companiestargetingtheopportunity,suchasAbraandPaycase,areU.S.,U.K.,
Canada,orChinabased.
10.GovernanceNetworks
Theblockchaingovernancenetworkwillcombineallthefeaturesandattributes
ofthenineotherGSNtypes.Ultimately,ablockchaingovernancenetwork
shouldstrivetobeinclusiveandwelcomeparticipationfromallrelevant
stakeholdergroups.Thenetworkshouldbeameritocracy,meaningthatthe
communitywouldchampionviableproposalsregardlessoftherankandstatusof
theproposer.Thenetworkshouldbetransparent,releasingallofitsdata,
documentation,andmeetingminutesforpublicscrutiny.Finally,decisions
shouldbereached,asmuchaspossible,byconsensusinordertogainlegitimacy
fortheoutcomes.
ANEWAGENDAFORTHENEXTDIGITALAGE
Ablockchaingovernancenetworkiscriticaltostewardshipofthisglobal
resource.ButhowcanweensurethatthisnextgenerationoftheInternetfulfills
itspromise?
Thenexteraofthedigitalageisdeliveringunlimitedpossibilities,
significantdangers,unknownroadblocks,formidablechallenges,andafuture
thatisfarfromcertain.Technology,especiallythedistributedkind,creates
opportunitiesforeveryone,butinexorablyhumansdeterminetheoutcome.Inthe
wordsofConstanceChoi,“Thistechnologyholdsbothpromiseandperil.It’s
howwewieldit.”
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Asthischapterhasdiscussed,thereisaroleforeveryoneto
playinachievingthenewpromiseofthedigitalage.
Inpreviousepochaltransitions,societiestookactiontoimplementnew
understandings,laws,andinstitutions.Thesetransformationsofcivilizationtook
time,usuallycenturies,andwereoftenpunctuatedbystrifeorevenrevolutions.
Todaythesituationisdifferent.Changeishappeninginfinitelyfaster.More
important,Moore’slawindicatesthattherateofchangeisaccelerating
exponentially.We’removingtotheproverbial“secondhalfofthechessboard”
whereexponentialgrowthuponexponentialgrowthcreatesthe
incomprehensible.
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Theupshotisthatourregulatoryandpolicyinfrastructures
arewoefullyinadequateandadaptingtooslowlyornotatalltotherequirements
ofthedigitalage.Thedisruptionsoftodayaremovingsofasttheyaregetting
beyondthecapacityofindividualsandinstitutionstocomprehendthem,let
alonemanagetheirimpact.Ourdemocraticinstitutionsandinstrumentswere
designedfortheindustrialage—infacttheyoriginatedpreciselyinthe
transformationfromagrarianfeudalsocietiesintoindustrialcapitaliststates.
Howcanweacceleratethehumantransformationrequiredtokeeppacewith
acceleratingtechnologicalinnovationanddisruption?Howcanweavoid
massivesocialdislocation,orworse?Lestwebeaccusedofbeingtechnology
deterministsorutopians,mayweproposethatit’stimeforanewsocialcontract
forthedigitalage.Governments,theprivatesector,thecivilsociety,and
individualsneedtocollaboratetoforgenewcommonunderstandings.
AsweenterthissecondgenerationoftheInternet,it’stimeforaManifesto
fortheDigitalAge.CallitaDeclarationofInterdependence.Digitalagecitizens
haveRights—accesstodigitalinfrastructures,literacy,medialiteracy,lifelong
learning,andrenewedfreedomofspeechonlinewithoutthefearofsurveillance.
Thedigitaleconomyandsocietyshouldbegovernedaccordingto
Principles.Surely,thosewhoworkshouldshareinthewealththeycreate.If
computerscandothework,thentheworkweek,notourstandardofliving,
shouldbereduced.Infact,Satoshi’simplicitdesignprinciplesfortheblockchain
revolutionshouldserveuswell—weneedinstitutionsthatactwithintegrity,
security,privacy,inclusion,rightsprotection,anddistributedpower.Let’swork
todistributeopportunityandprosperityatthepointoforigin,ratherthansimply
redistributingwealthafterit’sbeencreatedbytraditionalclassstructures.
Blockchaintechnologymayreducethecostsandsizeofgovernment,but
we’llstillneednewLawsinmanyareas.Therearetechnologicalandbusiness
modelsolutionstothechallengesofintellectualpropertyandrightsownership.
Soweshouldberewritingortrashingoldlawsthatstifleinnovationthrough
overprotectionofpatents.Betterantitrustactionmuststemthetrendtoward
monopoliessothatnooneoverpaysfor,say,basicInternetorfinancialservices.
EightypercentofAmericanshavenochoicewhenitcomestoInternetservice
providers,whichmighthelpexplainwhybandwidthisoneoftheslowestand
mostexpensiveinthedevelopedworld.Criminalfixerswhomanipulate
everythingfromforeignexchangetodieselemissionsshouldbeprosecutedand
punishedappropriately.
We’llneedInstitutionalTransformationacrosstheboard.Centralbankswill
needtochangetheirroleincurrencymanagementandmonetarypolicyand
collaboratemultilaterallywithmorestakeholdersintheeconomyandsociety.
Weneedschoolsanduniversitieswithstudent-focused,customizedcollaborative
masteryofinformationontheblockchain,freeingupstudentsandteachersalike
toparticipateinsmallgroupdiscussionandprojects.Weneedauniversalpatient
recordontheblockchain,toensurecollaborativehealthwhenwecanmanage
ourownwellnessoutsideofthesystem.Whenweenterthehealthcaresystem,
weshouldnotsufferbecauseofignorance-inspireddruginteractionsormedicine
notbasedonevidence.Politicianswillneedtoadapttoatransparentworld
wheresmartcontractsensuretheiraccountabilitytoelectorates.Howdowe
managethedisruptionafterdigitalcurrenciesupendthe$500billionremittances
market?
BlockchaintechnologycanenablenewPhysicalInfrastructuresrequiring
newpartnershipsandunderstandingsamongstakeholders.Whathappenstothe
millionsofUberdriverswhenSUberwipesouttheirjobs?Whatcancitiesdoto
ensurethatin2025citizensthinkpositivelyaboutintelligenttransportation
systems?Howdoweeffectivelymovetoadistributedblockchain-enabled
electricalpowergridwherehomeownersarecontributorsratherthanjust
customersofelectricity?Howwillwefindtheleadershiptoimplementa
blockchain-enabledpersonalcarbontradingsystem?
THETRUSTPROTOCOLANDYOU
Willthelawofparadigmskickintoeffect—thatleadersoftheoldhavethe
greatestdifficultyembracingthenew?ConsidertheleaderswhoendorsedDon’s
1994bookTheDigitalEconomy:theCEOsofNortelNetworks,MCI,Nynex,
Ameritech,andGEInformationServices,allofwhicharegone.Atleasthe
didn’tincludetheCEOsfromKodak,Borders,Blockbuster,orCircuitCity.
(AnothercautionarynoteforthekindjacketendorsersofBlockchain
Revolution.)
Whydidn’tRupertMurdochcreateTheHuffingtonPost?Whydidn’tAT&T
launchSkype,orVisacreatePayPal?CNNcouldhavebuiltTwitter,asitisall
aboutthesoundbite,no?GMorHertzcouldhavelaunchedUber,andMarriott,
Airbnb.GannettcouldhavecreatedCraigslistorKijiji.eBaywouldhavebeena
naturalplayfortheYellowPages.MicrosofthadtheresourcestocreateGoogle
oranynumberofbusinessmodelsbasedontheInternetratherthanthepersonal
computer.Whydidn’tNBCinventYouTube?Sonycouldhavepreempted
Apple’siTunes.WherewasKodakwhenitwastimeforInstagramorPinterestto
beinvented?WhatifPeopleorNewsweekhadcomeupwithBuzzFeedor
Mashable?
Aswewroteatthebeginningofthistome,“Itappearsthatonceagainthe
technologicalgeniehasbeenunleashedfromitsbottle...nowatourservicefor
anotherkickatthecan—totransformtheeconomicpowergridandtheoldorder
ofhumanaffairs.Ifwewillit.”LikethefirstgenerationoftheInternet,the
BlockchainRevolutionpromisestoupendbusinessmodelsandtransform
industries.Butthatisjustthestart.Blockchaintechnologyispushingus
inexorablyintoanewera,predicatedonopenness,merit,decentralization,and
globalparticipation.
Weexpectaperiodofvolatility,speculation,andmisuse.Wealsoexpecta
strongandsteadybarrelingforward,aplowingasideofthesacredcowsonthe
tracks.Nooneknowsyetwhatimpactthistrainwillhaveonfinancialservices.
IsBenLawskyright—thattheindustrycouldbeunrecognizableinfivetoten
years?TimDrapersaid,“BitcoinistothedollarastheInternetistopaper.”
74
Coulditbethatblockchain’smostardentsupportersareactuallyunderestimating
thelong-termpotentialhere?Willtheblockchainbethebiggestboontoindustry
efficiencyandvaluesincetheinventionofdouble-entryaccountingorthejoint-
stockcorporation?HernandodeSotosaidblockchainholdsthepotentialtobring
fivebillionpeopleintotheglobaleconomy,changetherelationshipbetweenthe
stateandcitizens(forthebetter),andbecomeapowerfulnewplatformfor
globalprosperityandaguarantorofindividualrights.Tohim,“thewholeideaof
peacethroughlaw,thewholeideaofonefamilyhumankindisthatwereach
agreementoncommonstandards.WeshouldconsiderhowtheUniversal
DeclarationofHumanRightscouldbebetterservedwithblockchain.”
75
How
canweachievethisbetterfuture?
Mostofthepeopleleadingtherevolutionarestillunknowns,exceptfor
veteranslikeNetscape’sprogenitorMarcAndreessen.You’velikelyneverheard
ofmostofthepeoplequotedinthisbook.Thenagain,who’dheardofIranian
immigrantPierreOmidyarorWallStreetprogrammerJeffBezosin1994?Much
dependsonhowtheleadersoftheindustrygetonboard.Isablockchain
alternativetoFacebookorTwitterreallyachievableorwilltheincumbents
respondbyaddressinguserconcernsaboutdataownershipandprivacy?Doesn’t
matter.Consumerswineitherway.WillVisawitherorwillitchangeitsbusiness
modeltoembracethepowerofblockchain?HowwillApplerespondtoanartist-
centeredmusicindustry?Whatwilltin-potdictatorsthinkaboutadecentralized
Internetthattheycan’tturnofforcontrol?Cantheblockchainmaketechnology
accessibletotheworld’stwobillionunbankedpeople?
Thefailurerateofstart-upsishigh,andsoweexpectagoodnumberofour
casestudiestofallbythewayside,notbecauseblockchaintechnologyisabad
idea,butbecause—foreachoneofourexamples—therearemanycompeting
start-ups.Allofthemcan’tsurvive.WebelievethosethatfollowSatoshi’s
principleshaveabettershotthanthosethatdon’t.
Theseareexcitingandperiloustimes.Asabusinessleader,useBlockchain
Revolutionasyourplaybook,sure,butrealizealsothattherulesofthegame
themselvesarechanging.Thinkaboutyourbusiness,yourindustry,andyour
job:HowwillIbeaffectedandwhatcanbedone?Donotfallintothetrap
broughtaboutbymanyparadigmshiftsthroughouthistory.Today’sleaders
cannotaffordtobetomorrow’slosers.Toomuchisatstakeandweneedyour
help.Pleasejoinus.
NOTES
Chapter1:TheTrustProtocol
1.https://www.technologyreview.com/s/419452/moores-outlaws/.
2.https://cryptome.org/jya/digicrash.htm.
3.“HowDigiCashBlewEverything,”translatedfromDutchintoEnglishbyIanGriggandcolleaguesand
e-mailedtoRobertHettingamailinglist,February10,1999.Cryptome.org.JohnYoungArchitects.Web.
July19,2015.https://cryptome.org/jya/digicash.htm.“HowDigiCashAllesVerknalde”
www.nextmagazine.nl/ecash.htm.Next!Magazine,January1999.Web.July19,2015.
https://web.archive.org/web/19990427/http://nextmagazine.nl/ecash.htm.
4.http://nakamotoinstitute.org/the-god-protocols/.
5.BrianFung,“MarcAndreessen:In20Years,We’llTalkAboutBitcoinLikeWeTalkAbouttheInternet
Today,”TheWashingtonPost,May21,2014;www.washingtonpost.com/blogs/the-
switch/wp/2014/05/21/marc-andreessen-in-20-years-well-talk-about-bitcoin-like-we-talk-about-the-
internet-today/,accessedJanuary21,2015.
6.InterviewwithBenLawsky,July2,2015.
7.www.economist.com/news/leaders/21677198-technology-behind-bitcoin-could-transform-how-
economy-works-trust-machine.
8.www.coindesk.com/bitcoin-venture-capital/.
9.Fung,“MarcAndreessen.”
10.www.coindesk.com/bank-of-england-economist-digital-currency/.
11.LeighBuchananreportsontheKauffmanFoundationresearchin“AmericanEntrepreneurshipIs
ActuallyVanishing,”www.businessinsider.com/927-people-own-half-of-the-bitcoins-2013-12.
12.ThisdefinitionwasdevelopedinDonTapscottandDavidTicoll,TheNakedCorporation(NewYork:
FreePress,2003).
13.www.edelman.com/news/trust-institutions-drops-level-great-recession/.
14.www.gallup.com/poll/1597/confidence-institutions.aspx.
15.InterviewwithCarlosMoreira,September3,2015.
16.DonTapscottisamemberoftheWISeKeyAdvisoryBoard.
17.DonTapscotthasbeenoneofmanyauthorstowriteaboutthedarksidepotentialofthedigitalage,for
exampleinTheDigitalEconomy:PromiseandPerilintheAgeofNetworkedIntelligence(NewYork:
McGrawHill,1995).
18.InterviewwithCarlosMoreira,September3,2015.
19.TomPeters,“TheWowProject,”FastCompany,MansuetoVenturesLLC,April30,1999;
http://www.fastcompany.com/36831/wow-project.
20.InterviewwithCarlosMoreira,September3,2015.
21.“TheVirtualYou”isatermpopularizedbyAnnCavoukianandDonTapscottinWhoKnows:
SafeguardingYourPrivacyinaNetworkedWorld(NewYork:McGraw-Hill,1997).
22.ScottMcNealy,thenCEOofSunMicrosystems,wasthefirstin1999.
23.InterviewwithAndreasAntonopoulos,July20,2015.
24.InterviewwithJoeLubin,July30,2015.
25.Eventuallysophisticatedpersonaldataqueryserviceswillnotevenbeabletoreadthatdatabecauseit
willbegiventothemencrypted.Stilltheywillbeabletoanswerquestionsregardingthatdatabyasking
thosequestionsoftheencrypteddataitselfusinghomomorphicencryptiontechniques.
26.LeadingthinkershaveabroadviewofprosperitythatgoesbeyondGDPgrowth.Harvard’sMichael
Porterhascreatedasocialprogressimperativehttp://www.socialprogressimperative.org.Economist
JosephStiglitzandothershaveresearchedmeasuresbeyondGDP—http://www.insee.fr/fr/publications-
et-services/dossiers_web/stiglitz/doc-commission/RAPPORT_anglais.pdf.Thereareothereffortsthattry
toimproveGDPbutstayclosertohome—http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-
get-ready-for-a-new-way-to-measure-the-economy/.
27.InterviewwithVitalikButerin,September30,2015.
28.LuigiMarcoBassani,“Life,Libertyand...:JeffersononPropertyRights,”JournalofLibertarian
Studies18(1)(Winter2004):58.
29.InterviewwithHernandodeSoto,November27,2015.
30.Ibid.
31.www.theguardian.com/music/2013/feb/24/napster-music-free-file-sharing,accessedAugust12,2015.
32.www.inc.com/magazine/201505/leigh-buchanan/the-vanishing-startups-in-decline.html.
33.NakedCitywasapolicedramaseriesthatairedfrom1958to1963ontheABCtelevisionnetwork.
34.AnOctober2015WorldEconomicForumreportsuggestsitwillnotbecomemainstreamuntil2027.
35.InterviewwithDavidTicoll,December12,2015.
Chapter2:BootstrappingtheFuture:SevenDesignPrinciplesofthe
BlockchainEconomy
1.InterviewwithAnnCavoukian,September2,2015.
2.GuyZyskind,OzNathan,andAlex“Sandy”Pentland,“Enigma:DecentralizedComputationPlatform
withGuaranteedPrivacy,”whitepaper,MassachusettsInstituteofTechnology,2015.June10,2015.
Web.October3,2015,arxiv.org/pdf/1506.03471.pdf.
3.InterviewwithAnnCavoukian,September2,2015.
4.Ibid.
5.InterviewwithAustinHill,July22,2015.
6.InterviewwithAnnCavoukian,September2,2015.
7.VitalikButerin,“ProofofStake:HowILearnedtoLoveWeakSubjectivity,”Ethereumblog,Ethereum
Foundation,November25,2014.Web.October3,2015,blog.ethereum.org/2014/11/25/proof-stake-
learned-love-weak-subjectivity.
8.DinoMarkAngaritis,e-mailattachment,November27,2015.Hearrivedathiscalculationby“assuming
hashrateof583,000,000Gh/s.(Gh/s=billionhashes/s).Thereare600secondsin10minutes.
600*583,000,000=349,800,000,000billionhashesin10minutes.That’s350Quintillion/
350,000,000,000,000,000,000/350millionmillionbillion.”
9.Proofofburncallsforminerstosendtheircoinstoadead-endaddresswheretheybecome
unredeemable.Inexchangeforburningthesecoins,minersgainentrancetoalotterywhere,presumably,
theywinbackmorethantheyburned.It’snotaconsensusmechanismbutatrustmechanism.
10.InterviewwithPaulBrody,July7,2015.
11.FranklinDelanoRoosevelt,“ExecutiveOrder6102—RequiringGoldCoin,GoldBullionandGold
CertificatestoBeDeliveredtotheGovernment,”TheAmericanPresidencyProject,ed.GerhardPeters
andJohnT.Woolley,April5,1933,www.presidency.ucsb.edu/ws/?pid=14611,accessedDecember2,
2015.
12.InterviewwithJoshFairfield,June1,2015.
13.AllusiontoBandai’sdigitaltoydesignedsothatuserswouldtakecareofitandprotectit.Itdiedifno
onetendedtoit.
14.JosephE.Stiglitz,“LessonsfromtheGlobalFinancialCrisisof2008,”SeoulJournalofEconomics
23(3)(2010).
15.Ernst&YoungLLP,“TheBigDataBacklash,”December2013,
www.ey.com/UK/en/Services/Specialty-Services/Big-Data-Backlash;http://tinyurl.com/ptfm4ax.
16.Thetypeofattackwasnamedafter“Sybil,”apseudonymofawomandiagnosedwithdissociative
identitydisorderdescribedina1973bookofthatname.Cat-lovingcomputerscientistJohn“JD”
Douceurpopularizedthenameina2002paper.
17.SatoshiNakamoto,“Bitcoin:APeer-to-PeerElectronicCashSystem,”www.bitcoin.org,November1,
2008;www.bitcoin.org/bitcoin.pdf,section6,“Incentive.”
18.NickSzabo.“Bitgold.”Unenumerated.NickSzabo.December27,2008.Web.October3,2015.
http://unenumerated.blogspot.com/2005/12/bit-gold.html.
19.InterviewwithAustinHill,July22,2015.
20.NealStephenson,SnowCrash(1992).AnallusiontoSnowCrashsvirtualworld,ofwhichHiro
Protagonististheprotagonistandhero.HirowasoneofthetophackersoftheMetaverse.Kongbucksare
likebitcoin:thefranchulates(corporatestates,fromthecombinationoffranchiseandconsulate)issue
theirownmoney.
21.ErnestCline,ReadyPlayerOne(NewYork:Crown,2011).
22.InterviewwithAustinHill,July22,2015.
23.JohnLennon.“Imagine.”Imagine.ProducersJohnLennon,YokoOno,andPhilSpector.October11,
1971.www.lyrics007.com/John%20Lennon%20Lyrics/Imagine%20Lyrics.html.
24.AndyGreenberg.“Banking’sDataSecurityCrisis.”Forbes.November2008.Web.October3,2015.
www.forbes.com/2008/11/21/data-breaches-cybertheft-identity08-tech-cx_ag_1121breaches.html.
25.PonemonInstituteLLC,“2015CostofDataBreachStudy:GlobalAnalysis,”sponsoredbyIBM,May
2015,www-03.ibm.com/security/data-breach.
26.PonemonInstituteLLC,“2014FifthAnnualStudyonMedicalIdentityTheft,”sponsoredbyMedical
IdentityFraudAlliance,February23,2015,Medidfraud.org/2014-fifth-annual-study-on-medical-identity-
theft.
27.InterviewwithAndreasAntonopoulos,July20,2015.
28.MichaelMelone,“BasicsandHistoryofPKI,”MikeMelone’sblog,MicrosoftCorporation,March10,
2012.Web.October3,2015.http://tinyurl.com/ngxuupl.
29.“WhyAren’tMorePeopleUsingEncryptedEmail?,”Virtrublog,VirtruCorporation,January24,2015.
Web.August8,2015.www.virtru.com/blog/aren’t-people-using-email-encryption,August8,2015.
30.InterviewwithAndreasAntonopoulos,July20,2015.
31.InterviewwithAustinHill,July22,2015.
32.Ibid.
33.InterviewwithAnnCavoukian,September2,2015.
34.Ibid.
35.DavidMcCandless,“WorldsBiggestDataBreaches,”InformationIsBeautiful,DavidMcCandless,
October2,2015.Web.October3,2015.www.informationisbeautiful.net/visualizations/worlds-biggest-
data-breaches-hacks/.
36.InterviewwithHalukKulin,June9,2015.
37.InterviewwithAustinHill,July22,2015.
38.Coinbaseprivacypolicy,www.coinbase.com/legal/privacy,November17,2014,accessedJuly15,
2015.
39.SeeDonTapscottandDavidTicoll,TheNakedCorporation:HowtheAgeofTransparencyWill
RevolutionizeBusiness(NewYork:Simon&Schuster,2003).
40.InterviewwithHalukKulin,June9,2015.
41.ProofofExistence.com,September2,2015;www.proofofexistence.com/about/.
42.InterviewwithSteveOmohundro,May28,2015.
43.InterviewwithAndreasAntonopoulos,July20,2015.
44.Ibid.
45.InterviewwithStephenPair,June11,2015.
46.EdellaSchlargerandElinorOstrom,“Property-RightsRegimesandNaturalResources:AConceptual
Analysis,”LandEconomics68(3)(August1992):249–62;www.jstor.org/stable/3146375.
47.InterviewwithHalukKulin,June9,2015.
48.JohnPaulTitlow,“FireYourBoss:Holacracy’sFounderontheFlatterFutureofWork,”FastCompany,
MansuetoVenturesLLC,July9,2015;www.fastcompany.com/3048338/the-future-of-work/fire-your-
boss-holacracys-founder-on-the-flatter-future-of-work.
49.WorldBank,September2,2015;www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-
in-number-of-unbanked-says-new-report.
50.“BitcoinPowersNewWorldwideCellphoneTop-UpService,”CoinDesk,February15,2015;
www.coindesk.com/bitcoin-powers-new-worldwide-cellphone-top-service/,accessedAugust26,2015.
FAQs,BitMoby.com,mHITsLtd.,n.d.;www.bitmoby.com/faq.html,accessedNovember14,2015.
51.InterviewwithGavinAndresen,June8,2015.
52.InterviewwithAustinHill,July22,2015.
53.JakobNielsen,“Nielsen’sLawofInternetBandwidth,”NielsenNormanGroup,April5,1998;
www.nngroup.com/articles/law-of-bandwidth/,accessedAugust26,2015.
54.MatthewWeaver,“WorldLeadersPayTributeatAuschwitzAnniversaryCeremony,”TheGuardian,
GuardianNewsandMediaLimited,January27,2015.Web.September5,2015,
http://www.theguardian.com/world/2015/jan/27/-sp-watch-the-auschwitz-70th-anniversary-ceremony-
unfold.
Chapter3:ReinventingFinancialServices
1.Estimatesrangefrom$87.5millionto$112million(IMF).
2.https://ripple.com/blog/the-true-cost-of-moving-money/.
3.InterviewwithVikramPandit,August24,2015.
4.www.nytimes.com/2015/07/12/business/mutfund/putting-the-public-back-in-public-finance.html.
5.www.worldbank.org/en/topic/poverty/overview.
6.http://hbswk.hbs.edu/item/6729.html.
7.InterviewwithHernandodeSoto,November27,2015.
8.http://corporate.westernunion.com/About_Us.html.
9.InterviewwithErikVoorhees,June16,2015.
10.PaulA.David,“TheDynamoandtheComputer:AnHistoricalPerspectiveontheModernProductivity
Paradox,”EconomicHistoryofTechnology80(2)(May1990):355–61.
11.JosephStiglitz,“LessonsfromtheGlobalFinancialCrisis,”revisedversionofalecturepresentedat
SeoulNationalUniversity,October27,2009.
12.www.finextra.com/finextra-downloads/newsdocs/The%20Fintech%202%200%20Paper.pdf.
13.www.bloomberg.com/news/articles/2015-07-22/the-blockchain-revolution-gets-endorsement-in-wall-
street-survey.
14.www.swift.com/assets/swift_com/documents/about_swift/SIF_201501.pdf.
15.https://lightning.network/.
16.InterviewwithChrisLarsen,July27,2015.
17.InterviewwithAustinHill,July22,2015.
18.InterviewwithBlytheMasters,July27,2015.
19.Ibid.
20.Ibid.
21.Ibid.
22.https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
23.InterviewwithAustinHill,July22,2015.
24.July2015byGreenwichAssociates;www.bloomberg.com/news/articles/2015-07-22/the-blockchain-
revolution-gets-endorsement-in-wall-street-survey.
25.BlytheMasters,fromExponentialFinancekeynotepresentation:www.youtube.com/watch?
v=PZ6WR2R1MnM.
26.https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
27.InterviewwithJesseMcWaters,August13,2015.
28.InterviewwithAustinHill,July22,2015.
29.https://blog.ethereum.org/2015/08/07/on-public-and-private-blockchains/.
30.InterviewwithChrisLarsen,July27,2015.
31.InterviewwithAdamLudwin,August26,2015.
32.InterviewwithBlytheMasters,July27,2015.
33.InterviewwithEricPiscini,July13,2015.
34.InterviewwithDerekWhite,July13,2015.
35.Ibid.
36.Later,BankofAmerica,BNYMellon,Citi,Commerzbank,DeutscheBank,HSBC,MitsubishiUFJ
FinancialGroup,MorganStanley,NationalAustraliaBank,RoyalBankofCanada,SEB,Société
Générale,andTorontoDominionBank;www.ft.com/intl/cms/s/0/f358ed6c-5ae0-11e5-9846-
de406ccb37f2.html#axzz3mf3orbRX;www.coindesk.com/citi-hsbc-partner-with-r3cev-as-blockchain-
project-adds-13-banks/.
37.http://bitcoinnewsy.com/bitcoin-news-mike-hearn-bitcoin-core-developer-joins-r3cev-with-5-global-
banks-including-wells-fargo/.
38.http://www.linuxfoundation.org/news-media/announcements/2015/12/linux-foundation-unites-industry-
leaders-advance-blockchain.
39.www.ifrasia.com/blockchain-will-make-dodd-frank-obsolete-bankers-say/21216014.article.
40.http://appft.uspto.gov/netacgi/nph-Parser?
Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-
bool.html&r=1&f=G&l=50&co1=AND&d=PG01&s1=20150332395&OS=20150332395&RS=20150332395?
p=cite_Brian_Cohen_or_Bitcoin_Magazine.
41.www.youtube.com/watch?v=A6kJfvuNqtg.
42.InterviewwithJeremyAllaire,June30,2015.
43.Ibid.
44.Ibid.
45.Ibid.
46.Heraldedasanothersigntheindustrywas“growingup”;www.wsj.com/articles/goldman-a-lead-
investor-in-funding-round-for-bitcoin-startup-circle-1430363042.
47.InterviewwithJeremyAllaire,June30,2015.
48.InterviewwithStephenPair,June11,2015.
49.AlexTapscotthasconsultedtoVogogoInc.
50.InterviewwithSureshRamamurthi,September28,2015.
51.E-mailcorrespondencewithBlytheMasters,December14,2015.
52.InterviewwithTomMornini,July20,2015.
53.TheseideaswereoriginallyexploredinTheNakedCorporationbyDonTapscottandDavidTicoll.
54.Ibid.
55.www.accountingweb.com/aa/auditing/human-errors-the-top-corporate-tax-and-accounting-mistakes.
56.Ibid.
57.InterviewwithSimonTaylor,July13,2015.
58.Ibid.
59.InterviewwithJeremyAllaire,June30,2015.
60.InterviewwithChristianLundkvist,July6,2015.
61.InterviewwithAustinHill,July22,2015.
62.InterviewwithEricPiscini,July13,2015.
63.www2.deloitte.com/us/en/pages/about-deloitte/articles/facts-and-figures.html.
64.InterviewwithEricPiscini,July13,2015.
65.Ibid.
66.InterviewwithTomMornini,July20,2015.
67.Ibid.
68.www.calpers.ca.gov/docs/forms-publications/global-principles-corporate-governance.pdf.
69.InterviewwithIzabellaKaminska,August5,2015.
70.http://listedmag.com/2013/06/robert-monks-its-broke-lets-fix-it/.
71.TheRighttoBeForgottenMovementisgainingsteam,particularlyinEurope:
http://ec.europa.eu/justice/data-protection/files/factsheets/factsheet_data_protection_en.pdf.
72.www.bloomberg.com/news/articles/2014-10-07/andreessen-on-finance-we-can-reinvent-the-entire-
thing.
73.http://www.nytimes.com/2015/12/24/business/dealbook/banks-reject-new-york-city-ids-leaving-
unbanked-on-sidelines.html.
74.InterviewwithPatrickDeegan,June6,2015.
75.Ibid.
76.https://btcjam.com/.
77.InterviewwithErikVoorhees,June16,2015.
78.www.sec.gov/about/laws/sa33.pdf.
79.http://www.wired.com/2015/12/sec-approves-plan-to-issue-company-stock-via-the-bitcoin-blockchain/.
80.http://investors.overstock.com/mobile.view?c=131091&v=203&d=1&id=2073583.
81.https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
82.JamesSurowiecki,TheWisdomofCrowds:WhytheManyAreSmarterThantheFewandHow
CollectiveWisdomShapesBusiness,Economies,SocietiesandNations(NewYork:Doubleday,2014).
83.www.augur.net.
84.Frome-mailexchangewiththeAugurteam:JackPeterson,CoreDeveloper;JoeyKrug,Core
Developer;PeronetDespeignes,SpecialOps.
85.InterviewwithAndreasAntonopoulos,December8,2014.
86.InterviewwithBarrySilbert,September22,2015.
87.InterviewwithBenjaminLawsky,July2,2015.
Chapter4:Re-architectingtheFirm:TheCoreandtheEdges
1.InterviewwithJoeLubin,July13,2015.
2.CompanieslikeAppleandSpotifywillbeabletousethenewplatformaswell.Thegoalisthatitwillbe
ownedbymanyentitiesinthemusicindustry,especiallyartists.Itwilllikelybeeasiertoearntokensif
youcreatecontentthanifyoujustresellsomeoneelse’scontent.
3.https://slack.com/is.
4.https://github.com.
5.Coasewrote:“Afirmhasaroletoplayintheeconomicsystemif...[t]ransactionscanbeorganized
withinthefirmatlesscostthanifthesametransactionswerecarriedoutthroughthemarket.Thelimitto
thesizeofthefirm[isreached]whenthecostsoforganizingadditionaltransactionswithinthefirm
[exceed]thecostsofcarryingthesametransactionsinthemarket.”AscitedinOliverWilliamsonand
SydneyG.Winter,eds.,TheNatureoftheFirm(NewYorkandOxford:OxfordUniversityPress,1993),
90.
6.OliverWilliamson,“TheTheoryoftheFirmasGovernanceStructure:FromChoicetoContract,”The
JournalofEconomicPerspectives16(3)(Summer2002)171–95.
7.Ibid.
8.PeterThielwithBlakeMasters,ZerotoOne:NotesonStartups,orHowtoBuildtheFuture(NewYork:
CrownBusiness,2014).
9.LordWilberforce,TheLawofRestrictiveTradePracticesandMonopolies(Sweet&Maxwell,1966),
22.
10.InterviewwithYochaiBenkler,August26,2015.
11.JohnHagelandJohnSeelyBrown,“EmbracetheEdgeorPerish,”Bloomberg,November28,2007;
www.bloomberg.com/bw/stories/2007-11-28/embrace-the-edge-or-perishbusinessweek-business-news-
stock-market-and-financial-advice.
12.InterviewwithVitalikButerin,September30,2015.
13.InterviewwithAndreasAntonopoulos,July20,2015.
14.TheoneexceptionistheWayBackMachine,whichallowsyoutogetadeeperhistory.
15.OliverE.Williamson,“TheTheoryoftheFirmasGovernanceStructure:FromChoicetoContract,”
JournalofEconomicPerspectives16(3),Summer2002.
16.Ibid.
17.MichaelC.JensenandWilliamH.Meckling,“TheoryoftheFirm:ManagerialBehavior,AgencyCosts
andOwnershipStructure,”JournalofFinancialEconomics305(1976):310–11(arguingthatthe
corporation—or,moregenerally,afirm—isacollectionofconsensualrelationshipsamongshareholders,
creditors,managers,andperhapsothers);seealsogenerally,FrankH.EasterbrookandDanielR.Fischel,
TheEconomicStructureofCorporateLaw(Cambridge,Mass.:HarvardUniversityPress,1991).
18.VitalikButerin,“BootstrappingaDecentralizedAutonomousCorporation:PartI,”BitcoinMagazine,
September19,2013;https://bitcoinmagazine.com/7050/bootstrapping-a-decentralized-autonomous-
corporation-part-i/.
19.NickSzabo,“FormalizingandSecuringRelationshipsonPublicNetworks,”
http://szabo.best.vwh.net/formalize.html.
20.http://szabo.best.vwh.net/smart.contracts.html.
21.InterviewwithAaronWright,August10,2015.
22.Cryptographersstartedusing“Alice”and“Bob”insteadof“PartyA”and“PartyB”asaconvenient
waytodescribeexchangesbetweenthem,lendingsomeclarityandfamiliaritytodiscussionsabout
computationalencryption.ThepracticeissaidtodatefromRonRivests1978work,“Security’s
InseparableCouple,”CommunicationsoftheACM.NetworkWorld,February7,2005;
www.networkworld.com/news/2005/020705widernetaliceandbob.html.
23.GitHub.com,January3,2012;https://github.com/bitcoin/bips/blob/master/bip-0016.mediawiki,
accessedSeptember30,2015.
24.www.coindesk.com/hedgy-hopes-tackle-bitcoin-volatility-using-multi-signature-technolog/.
25.https://books.google.ca/books?id=VXIDgGjLHVgC&pg=PA19&lpg=PA19&
dq=a+workman+moves+from+department+Y+to+department+X&source=bl&ots=RHb0qrpLz_&sig=LaZFqatLYllrBW8ikPn4PEZ9_7U&hl=en&sa=X&ved=0ahUKEwjgyuO2gKfKAhUDpB4KHb0JDcAQ6AEIITAB#v=onepage&q=a
%20workman%20moves%20from%20department%20Y%20to%20department%20X&f=false.
26.ElliotJaques,“InPraiseofHierarchy,”HarvardBusinessReview,January–February1990.
27.InterviewwithYochaiBenkler,August26,2015.
28.TapscottandTicoll,TheNakedCorporation.
29.WernerErhardandMichaelC.Jensen,“PuttingIntegrityintoFinance:APurelyPositiveApproach,”
November27,2015,HarvardBusinessSchoolNOMUnitWorkingPaperNo.12-074;BarbadosGroup
WorkingPaperNo.12-01;EuropeanCorporateGovernanceInstitute(ECGI)—FinanceWorkingPaper
No.417/2014.
30.BankofAmerica’sAverageReturnonEquitysinceDecember31,2009,islessthan2percent;
https://ycharts.com/companies/BAC/return_on_equity.
31.InterviewwithSteveOmohundro,May28,2015.
32.E-mailinterviewwithDavidTicoll,December9,2015.
33.InterviewwithMelanieSwan,September14,2015.
34.https://hbr.org/1990/05/the-core-competence-of-the-corporation.
35.MichaelPorter,“WhatIsStrategy?,”HarvardBusinessReview,November–December1996.
36.InterviewwithSusanAthey,November20,2015.
Chapter5:NewBusinessModels:MakingItRainontheBlockchain
1.Topreventspam,it’spossiblethatnewpublickeys(personas)withlowreputationwillhavetopaya
certainfeetolist.Thefeecanbemovedtoanescrowcontractandbereturnedoncethepersonahas
successfullyrentedtheirpropertyout,orperhapsaftersomeperiodoftimeelapsesandtheydecideto
deletetheirlisting.LargedataitemslikepictureswillbekeptonIPFSorSwarm,butthehashofthedata
andtheinformationidentifyingthepersonathatownsthedatawillbekeptontheblockchaininsidethe
bAirbnbcontract.
2.PerhapsusingtheWhisperprotocol.
3.FormattedandannotatedwiththeHypertextMarkupLanguage(HTML).
4.DavidMcCandless,“World’sBiggestDataBreaches,”InformationIsBeautiful,October2,2015;
www.informationisbeautiful.net/visualizations/worlds-biggest-data-breaches-hacks/,accessedNovember
27,2015.
5.AsdefinedbyVitalikButerin:“Cryptoeconomicsisatechnicaltermroughlymeaning‘it’sdecentralized,
itusespublickeycryptographyforauthentication,andituseseconomicincentivestoensurethatitkeeps
goinganddoesn’tgobackintimeorincuranyotherglitch.’”From“TheValueofBlockchain
Technology,PartI,”https://blog.ethereum.org/2015/04/13/visions-part-1-the-value-of-blockchain-
technology/.
6.www.youtube.com/watch?v=K2fhwMKk2Eg.
7.http://variety.com/2015/digital/news/netflix-bandwidth-usage-internet-traffic-1201507187/.
8.InterviewwithBramCohen,August17,2015.
9.StanFranklinandArtGraesser,“IsItanAgent,orJustaProgram?ATaxonomyforAutonomous
Agents,”www.inf.ufrgs.br/~alvares/CMP124SMA/IsItAnAgentOrJustAProgram.pdf.
10.Ibid.,5.
11.VitalikButerin,https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-
terminology-guide/.“Autonomousagentsareontheothersideoftheautomationspectrum;inan
autonomousagent,thereisnonecessaryspecifichumaninvolvementatall;thatistosay,whilesome
degreeofhumaneffortmightbenecessarytobuildthehardwarethattheagentrunson,thereisnoneed
foranyhumanstoexistthatareawareoftheagent’sexistence.”
12.Ibid.
13.Technicaldetail:Becausestoringdatadirectlyonblockchainsisveryexpensive,it’smorelikelythat
thereisahashofthedata,andthedataitselfwillbeonsomeotherdecentralizeddatastoragenetwork
likeSwarmorIPFS.
14.InterviewwithVitalikButerin,September30,2015.
15.InterviewwithAndreasAntonopoulos,July20,2015.
16.Ibid.
17.DonTapscottandAnthonyD.Williams,Wikinomics:HowMassCollaborationChangesEverything
(NewYork:Portfolio/Penguin,2007).Wikinomicsdefinedsevensuchbusinessmodels.Thelisthasbeen
extendedhere.
18.Commons-basedPeerProductionisatermdevelopedbyHarvardLawprofessorYochaiBenklerinthe
seminalarticle“Coase’sPenguin,”TheYaleLawJournal,2002;
www.yale.edu/yalelj/112/BenklerWEB.pdf.
19.http://fortune.com/2009/07/20/information-wants-to-be-free-and-expensive/.
20.InterviewwithYochaiBenkler,August26,2015.
21.InterviewwithDinoMarkAngaritis,August7,2015.
22.AndrewLih,“CanWikipediaSurvive?,”TheNewYorkTimes,June20,2015;
www.nytimes.com/2015/06/21/opinion/can-wikipedia-survive.html.
23.http://techcrunch.com/2014/05/09/monegraph/.
24.http://techcrunch.com/2015/06/24/ascribe-raises-2-million-to-ensure-you-get-credit-for-your-art/.
25.www.nytimes.com/2010/04/15/technology/15twitter.html?_r=0.
26.http://techcrunch.com/2014/05/09/monegraph/.
27.www.verisart.com/.
28.http://techcrunch.com/2015/07/07/verisart-plans-to-use-the-blockchain-to-verify-the-authencity-of-
artworks/.
29.InterviewwithYochaiBenkler,August26,2015.
30.InterviewwithDavidTicoll,August7,2015.
31.InterviewwithYochaiBenkler,August26,2015.
32.www.nytimes.com/2013/07/21/opinion/sunday/friedman-welcome-to-the-sharing-economy.html?
pagewanted=1&_r=2&partner=rss&emc=rss&.
33.SarahKessler,“TheSharingEconomyIsDeadandWeKilledIt,”FastCompany,September14,2015;
www.fastcompany.com/3050775/the-sharing-economy-is-dead-and-we-killed-it#1.
34.“Prosumers”isaterminventedbyAlvinTofflerinFutureShock(1980).InTheDigitalEconomy
(1994)DonTapscottdevelopedtheconceptandnotionof“prosumption.”
35.InterviewwithRobinChase,September2,2015.
36.https://news.ycombinator.com/item?id=9437095.
37.ThisscenariowasoriginallyexplainedbyDonTapscottin“TheTransparentBurger,”Wired,March
2004;http://archive.wired.com/wired/archive/12.03/start.html?pg=2%3ftw=wn_tophead_7.
38.InterviewwithYochaiBenkler,August26,2015.
39.Called“thewikiworkplace”inWikinomics.
40.CAPTCHAstandsfor“CompletelyAutomatedPublicTuringTesttoTellComputersandHumans
Apart.”
41.InterviewwithJoeLubin,July13,2015.
42.Ibid.
Chapter6:TheLedgerofThings:AnimatingthePhysicalWorld
1.Nottheirrealnames.Thisstoryisbasedondiscussionswithindividualsfamiliarwiththesituation.
2.PrimaveraDeFilippi,“It’sTimetoTakeMeshNetworksSeriously(andNotJustfortheReasonsYou
Think),”Wired,January2,2014.
3.InterviewwithEricJennings,July10,2015.
4.Ibid.
5.InterviewwithLawrenceOrsini,July30,2015.
6.DonpredictedthedevelopmentofsuchnetworksinDonTapscottandAnthonyWilliams,
Macrowikinomics:NewSolutionsforaConnectedPlanet(NewYork:Portfolio/Penguin,2010,updated
2012).
7.InterviewwithLawrenceOrsini,July30,2015.
8.PujaMondal,“WhatIsDesertification?Desertification:Causes,EffectsandControlofDesertification,”
UNEP:Desertifcation,UnitedNationsEnvironmentProgramme,n.d.;
https://desertification.wordpress.com/category/ecology-environment/unep/,accessedSeptember29,
2015.
9.www.internetlivestats.com/internet-users/,asofDecember1,2015.
10.CadieThompson,“ElectronicPillsMayBetheFutureofMedicine,”CNBC,April21,2013;
www.cnbc.com/id/100653909;andNattGarun,“FDAApprovesEdibleElectronicPillsThatSenseWhen
YouTakeYourMedication,”DigitalTrends,August1,2012;www.digitaltrends.com/home/fda-approves-
edible-electronic-pills/.
11.MarkJaffe,“IOTWon’tWorkWithoutArtificialIntelligence,”Wired,November2014;
www.wired.com/insights/2014/11/iot-wont-work-without-artificial-intelligence/.
12.IBM,“DeviceDemocracy,”2015,4.
13.AllisonArieff,“TheInternetofWayTooManyThings,”TheNewYorkTimes,September5,2015.
14.IBM,“DeviceDemocracy,”10.
15.InterviewwithDinoMarkAngaritis,August11,2015.
16.InterviewwithCarlosMoreira,September3,2015.
17.Ibid.
18.InterviewwithMichelleTinsley,June25,2015.
19.Ibid.
20.McKinseyGlobalInstitute,“TheInternetofThings:MappingtheValueBeyondtheHype,”June2015.
21.InterviewwithEricJennings,July10,2015.
22.IBMInstituteforBusinessValue,“TheEconomyofThings:ExtractingNewValuefromtheInternetof
Things,”2015.
23.CadieThompson,“AppleHasaSmartHomeProblem:PeopleDon’tKnowTheyWantItYet,”
BusinessInsider,June4,2015;www.businessinsider.com/apple-homekit-adoption-2015-6.
24.McKinseyGlobalInstitute,“TheInternetofThings.”
25.InterviewwithEricJennings,July10,2015.
26.IBM,“DeviceDemocracy,”9.
27.Ibid.,13.
28.McKinseyGlobalInstitute,“TheInternetofThings.”MGIdefinedninesettingswithvaluepotential.
29.www.wikihow.com/Use-Uber.
30.http://consumerist.com/tag/uber/page/2/.
31.MikeHearn,“FutureofMoney,”TuringFestival,Edinburgh,Scotland,August23,2013,posted
September28,2013;www.youtube.com/watch?v=Pu4PAMFPo5Y&feature=youtu.be.
32.McKinsey,“AnExecutive’sGuidetotheInternetofThings,”August2015;
www.mckinsey.com/Insights/Business_Technology/An_executives_guide_to_the_Internet_of_Things?
cid=digital-eml-alt-mip-mck-oth-1508.
Chapter7:SolvingtheProsperityParadox:EconomicInclusionand
Entrepreneurship
1.http://datatopics.worldbank.org/financialinclusion/country/nicaragua.
2.www.budde.com.au/Research/Nicaragua-Telecoms-Mobile-and-Broadband-Market-Insights-and-
Statistics.html.
3.“PropertyDisputesinNicaragua,”U.S.Embassy,
http://nicaragua.usembassy.gov/property_disputes_in_nicaragua.html.Thereareanestimatedthirty
thousandpropertiesindispute.
4.InterviewwithJoyceKim,June12,2015.
5.Ibid.
6.Ibid.
7.www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-in-number-of-unbanked-says-new-
report;andC.K.Prahalad,TheFortuneattheBottomofthePyramid:EradicatingPovertyThrough
Profits(Philadelphia:WhartonSchoolPublishing,2009).Thisfigureisanestimate.
8.InterviewwithJoyceKim,June12,2015.
9.www.ilo.org/global/topics/youth-employment/lang—en/index.htm.
10.ThomasPiketty,CapitalintheTwenty-FirstCentury(Cambridge,Mass.:BelknapPress,2014).
11.
www.brookings.edu/~/media/research/files/papers/2014/05/declining%20business%20dynamism%20litan/declining_business_dynamism_hathaway_litan.pdf.
12.RuthSimonandCaelainnBarr,“EndangeredSpecies:YoungU.S.Entrepreneurs,”TheWallStreet
Journal,January2,2015;www.wsj.com/articles/endangered-species-young-u-s-entrepreneurs-
1420246116.
13.WorldBankGroup,DoingBusiness,www.doingbusiness.org/data/exploretopics/starting-a-business.
14.InterviewwithHernandodeSoto,November27,2015.
15.www.tamimi.com/en/magazine/law-update/section-6/june-4/dishonoured-cheques-in-the-uae-a-
criminal-law-perspective.html.
16.www.worldbank.org/en/topic/poverty/overview.Tobeprecise,itwas1.91billionin1990.
17.http://digitalcommons.georgefox.edu/cgi/viewcontent.cgi?article=1003&context=gfsb.
18.http://reports.weforum.org/outlook-global-agenda-2015/top-10-trends-of-2015/1-deepening-income-
inequality/.
19.Ibid.
20.InterviewwithTylerWinklevoss,June9,2015.
21.Congo,Chad,CentralAfricanRepublic,SouthSudan,Niger,Madagascar,Guinea,Cameroon,Burkina
Faso,Tanzania;http://data.worldbank.org/indicator/FB.CBK.BRCH.P5?
order=wbapi_data_value_2013+wbapi_data_value+wbapi_data_value-last&sort=asc.
22.www.aba.com/Products/bankcompliance/Documents/SeptOct11CoverStory.pdf.
23.http://www.nytimes.com/2015/12/24/business/dealbook/banks-reject-new-york-city-ids-leaving-
unbanked-on-sidelines.html.
24.E-mailcorrespondencewithJoeLubin,August6,2015.
25.DavidBirch,IdentityIstheNewMoney(London:LondonPublishingPartnership,2014),1.
26.E-mailcorrespondencewithJoeLubin,August6,2015.
27.InterviewwithJoyceKim,June12,2015.
28.InterviewwithHernandodeSoto,November27,2015.
29.InterviewwithHalukKulin,June9,2015.
30.E-mailcorrespondencewithJoeLubin,August6,2015.
31.InterviewwithBalajiSrinivasan,May29,2014.
32.www.doingbusiness.org/data/exploretopics/starting-a-business.
33.InterviewwithHalukKulin,June9,2015.
34.AnalieDomingoagreedtoletusshadowherasshewentthroughhernormalroutineofsendingmoney
hometohermotherinthePhilippines.AnaliehasbeenanemployeeofDonTapscottandAnaLopesfor
twentyyearsandisalsoaclosefriend.
35.www12.statcan.gc.ca/nhs-enm/2011/dp-pd/prof/details/page.cfm?
Lang=E&Geo1=PR&Code1=01&Data=Count&SearchText=canada&SearchType=Begins&SearchPR=01&A1=All&B1=All&Custom=&TABID=1.
36.https://remittanceprices.worldbank.org/sites/default/files/rpw_report_june_2015.pdf.
37.Theremittancemarketis$500billion;averagefeesof7.7percenttranslateto$38.5billioninfees.
38.DilipRatha,“TheImpactofRemittancesonEconomicGrowthandPovertyReduction,”Migration
PolicyInstitute8(September2013).
39.AdolfBarajas,etal.,“DoWorkers’RemittancesPromoteEconomicGrowth?,”IMFWorkingPaper,
www10.iadb.org/intal/intalcdi/pe/2009/03935.pdf.
40.“AidandRemittancesfromCanadatoSelectCountries,”CanadianInternationalDevelopment
Platform,http://cidpnsi.ca/blog/portfolio/aid-and-remittances-from-canada/.
41.WorldBankRemittancePriceIndex,https://remittanceprices.worldbank.org/en.
42.2011NationalHouseholdSurveyHighlights,CanadianCensusBureau,
www.fin.gov.on.ca/en/economy/demographics/census/nhshi11-1.html.
43.https://support.skype.com/en/faq/FA1417/how-much-bandwidth-does-skype-need.
44.InterviewwithEricPiscini,July13,2015.
45.http://corporate.westernunion.com/Corporate_Fact_Sheet.html.
46.Atthetimeofwriting,AbrahadnotopeneditsdoorsinCanada.However,wewereabletotestAbra’s
technologywithAnalieandhermothersuccessfullywithAbra’shelp.
47.InterviewwithBillBarhydt,August25,2015.
48.Ibid.
49.Ibid.
50.“ForeignAidandRent-Seeking,TheJournalofInternationalEconomics,2000,438;
http://conferences.wcfia.harvard.edu/sites/projects.iq.harvard.edu/files/gov2126/files/1632.pdf.
51.Ibid.
52.www.propublica.org/article/how-the-red-cross-raised-half-a-billion-dollars-for-haiti-and-built-6-homes.
53.“Mortality,CrimeandAccesstoBasicNeedsBeforeandAftertheHaitiEarthquake,”Medicine,
ConflictandSurvival26(4)(2010).
54.http://unicoins.org/.
55.JeffreyAshewithKylaJaggerNeilan,InTheirOwnHands:HowSavingsGroupsAreRevolutionizing
Development(SanFrancisco:Berrett-KoehlerPublishers,2014).
56.E.KumarSharma,“FounderFalls,”BusinessToday(India),December25,2011;
www.businesstoday.in/magazine/features/vikram-akula-quits-sks-microfiance-loses-or-
gains/story/20680.html.
57.NingWang,“MeasuringTransactionCosts:AnIncompleteSurvey,”RonaldCoaseInstituteWorking
Papers2(February2003);www.coase.org/workingpapers/wp-2.pdf.
58.www.telesurtv.net/english/news/Honduran-Movements-Slam-Repression-of-Campesinos-in-Land-
Fight-20150625-0011.html.
59.USAID,theMillenniumChallengeCorporation,andtheUNFoodandAgricultureOrganization.
60.PaulB.Siegel,MalcolmD.Childress,andBradfordL.Barham,“ReflectionsonTwentyYearsofLand-
RelatedDevelopmentProjectsinCentralAmerica:TenThingsYouMightNotExpect,andFuture
Directions,”KnowledgeforChangeSeries,InternationalLandCoalition(ILC),Rome,2013;
http://tinyurl.com/oekhzos,accessedAugust26,2015.
61.Ibid.
62.AmbassadorMichaelB.G.Froman,USOfficeoftheTradeRepresentative,“2015NationalTrade
EstimateReportonForeignTradeBarriers,”USTR.gov,April1,2015;
https://ustr.gov/sites/default/files/files/reports/2015/NTE/2015%20NTE%20Honduras.pdf.
63.InterviewwithHernandodeSoto,November27,2015.
64.http://in.reuters.com/article/2015/05/15/usa-honduras-technology-idINKBN0O01V720150515.
65.InterviewwithKausikRajgopal,August10,2015.
66.WorldBank,“DoingBusiness2015:GoingBeyondEfficiencies,”Washington,D.C.:WorldBank,
2014;DOI:10.1596/978-1-4648-0351-2,LicenseCreativeCommonsAttributionCCBY3.0IGO.
67.“ITUReleases2014ICTFigures,”
www.itu.int/net/pressoffice/press_releases/2014/23.aspx#.VEfalovF_Kg.
68.www.cdc.gov/healthliteracy/learn/understandingliteracy.html.
69.www.proliteracy.org/the-crisis/adult-literacy-facts.
70.CIAWorldFactbook,literacystatistics,www.cia.gov/library/publications/the-world-
factbook/fields/2103.html#136.
Chapter8:RebuildingGovernmentandDemocracy
1.http://europa.eu/about-eu/countries/member-countries/estonia/index_en.htm;
http://www.citypopulation.de/Canada-MetroEst.html.
2.In-personconversationbetweenEstonianpresidentToomasHendrikIlvesandDonTapscottattheWorld
EconomicForum’sGlobalAgendaCouncilmeetinginAbuDhabi,UnitedArabEmirates,October2015.
3.
www.socialprogressimperative.org/data/spi#data_table/countries/com6/dim1,dim2,dim3,com9,idr35,com6,idr16,idr34.
4.https://e-estonia.com/the-story/the-story-about-estonia/.Estoniaisveryproudofitse-Estoniainitiatives
andhaspublishedalotofinformationontheWeb.Alloftheinformationandstatisticsusedinthis
sectioncamefromtheGovernmentofEstoniaWebsite.
5.“ElectronicHealthRecord,”e-Estonia.com,n.d.;https://e-estonia.com/component/electronic-health-
record/,accessedNovember29,2015.
6.“e-Cabinet,”e-Estonia.com,n.d.;https://e-estonia.com/component/e-cabinet/,accessedNovember29,
2015.
7.“ElectronicLandRegister,”e-Estonia.com,n.d.;https://e-estonia.com/component/electronic-land-
register/,accessedNovember29,2015.
8.CharlesBrett,“MyLifeUnderEstonia’sDigitalGovernment,”TheRegister,
www.theregister.co.uk/2015/06/02/estonia/.
9.InterviewwithMikeGault,August28,2015.
10.“KeylessSignatureInfrastructure,”e-Estonia.com,n.d.;https://e-estonia.com/component/keyless-
signature-infrastructure/,accessedNovember29,2015.
11.OlgaKharif,“BitcoinNotJustforLibertariansandAnarchistsAnymore,”BloombergBusiness,
October9,2014;www.bloomberg.com/bw/articles/2014-10-09/bitcoin-not-just-for-libertarians-and-
anarchists-anymore.Tobesure,thereisastronglibertariantrendintheAmericanpopulationasawhole.
AccordingtothePewResearchCenter,11percentofAmericansdescribethemselvesaslibertarianand
knowthedefinitionoftheterm.“InSearchofLibertarians,”www.pewresearch.org/fact-
tank/2014/08/25/in-search-of-libertarians/.
12.“BitcoinProvestheLibertarianIdeaofParadiseWouldBeHellonEarth,”BusinessInsider,
www.businessinsider.com/bitcoin-libertarian-paradise-would-be-hell-on-earth-2013-12#ixzz3kQqSap00.
13.HumanRightsWatch,“WorldReport2015:Eventsof2014,”
www.hrw.org/sites/default/files/wr2015_web.pdf.
14.InterviewwithHernandodeSoto,November27,2015.
15.SeymourMartinLipset,PoliticalMan:TheSocialBasesofPolitics,2nded.(London:Heinemann,
1983),64.
16.InterviewwithHernandodeSoto,November27,2015.
17.HernandodeSoto,“TheCapitalistCureforTerrorism,”TheWallStreetJournal,October10,2014;
www.wsj.com/articles/the-capitalist-cure-for-terrorism-1412973796,accessedNovember27,2015.
18.InterviewwithHernandodeSoto,November27,2015.
19.InterviewwithCarlosMoreira,September3,2015.
20.MelanieSwan,Blockchain:BlueprintforaNewEconomy(Sebastopol,Calif.:O’ReillyMedia,January
2015),45.
21.EmilySpaven,“UKGovernmentExploringUseofBlockchainRecordkeeping,”CoinDesk,September
1,2015;www.coindesk.com/uk-government-exploring-use-of-blockchain-recordkeeping/.
22.J.P.Buntinx,“‘BlockchainTechnology’IsBringingBitcointotheMainstream,”Bitcoinist.net,August
29,2015;http://bitcoinist.net/blockchain-technology-bringing-bitcoin-mainstream/.
23.MelanieSwan,quotedinAdamStone,“UnchainingInnovation:CouldBitcoin’sUnderlyingTechBea
PowerfulToolforGovernment?,”GovernmentTechnology,July10,2015;
www.govtech.com/state/Unchaining-Innovation-Could-Bitcoins-Underlying-Tech-be-a-Powerful-Tool-
for-Government.html.
24.Seeforexamplewww.partnerships.org.au/andwww.in-control.org.uk/what-we-do.aspx.
25.InterviewwithPerianneBoring,August7,2015.SeealsoJosephYoung,“8WaysGovernmentsCould
UsetheBlockchaintoAchieve‘RadicalTransparency,’”CoinTelegraph,July13,2015;
http://cointelegraph.com/news/114833/8-ways-governments-could-use-the-blockchain-to-achieve-
radical-transparency.
26.www.data.gov.
27.www.data.gov.uk.
28.BenSchiller,“ARevolutionofOutcomes:HowPay-for-SuccessContractsAreChangingPublic
Services,”Co.Exist,www.fastcoexist.com/3047219/a-revolution-of-outcomes-how-pay-for-success-
contracts-are-changing-public-services.Alsosee:www.whitehouse.gov/blog/2013/11/20/building-
smarter-more-efficient-government-through-pay-success.
29.R.C.Porter,“CanYou‘Snowden-ProoftheNSA?:HowtheTechnologyBehindtheDigitalCurrency
—Bitcoin—CouldStoptheNextEdwardSnowden,”Fortuna’sCorner,June3,2015;
http://fortunascorner.com/2015/06/03/can-you-snowden-proof-the-nsa-how-the-technology-behind-the-
digital-currency-bitcoin-could-stop-the-next-edward-snowden/.
30.ElliotMaras,“LondonMayoralCandidateGeorgeGallowayCallsforCityGovernmenttoUseBlock
ChainforPublicAccountability,”BitcoinNews,July2,2015;www.cryptocoinsnews.com/london-
mayoral-candidate-george-galloway-calls-city-government-use-block-chain-public-accountability/.
31.Tapscott,TheDigitalEconomy,304.
32.AlGore,speechtotheWeMediaconference,October6,2005;
www.fpp.co.uk/online/05/10/Gore_speech.html.
33.Ibid.
34.“ThePersistenceofConspiracyTheories,”TheNewYorkTimes,April30,2011;
www.nytimes.com/2011/05/01/weekinreview/01conspiracy.html?pagewanted=all&_r=0.
35.www.nytimes.com/2014/07/06/upshot/when-beliefs-and-facts-collide.html?
module=Search&mabReward=relbias:w;%201RI:6%20%3C{:}%3E.
36.“PlainLanguage:It’stheLaw,”PlainLanguageActionandInformationNetwork,n.d.:
www.plainlanguage.gov/plLaw/,accessedNovember30,2015.
37.https://globalclimateconvergence.org/news/nyt-north-carolinas-election-machine-blunder.
38.http://users.encs.concordia.ca/~clark/papers/2012_fc.pdf.
39.http://link.springer.com/chapter/10.1007%2F978-3-662-46803-6_16.
40.http://blogs.wsj.com/digits/2015/07/29/scientists-in-greece-design-cryptographic-e-voting-platform/.
41.http://nvbloc.org/.
42.http://cointelegraph.com/news/114404/true-democracy-worlds-first-political-app-blockchain-party-
launches-in-australia.
43.www.techinasia.com/southeast-asia-blockchain-technology-bitcoin-insights/.
44.Ibid.
45.www.washingtonpost.com/news/wonkblog/wp/2014/08/06/a-comprehensive-investigation-of-voter-
impersonation-finds-31-credible-incidents-out-of-one-billion-ballots-cast/.
46.www.eac.gov/research/election_administration_and_voting_survey.aspx.
47.http://america.aljazeera.com/opinions/2015/7/most-americans-dont-vote-in-elections-heres-why.html.
48.InterviewwithEduardoRoblesElvira,September10,2015.
49.www.chozabu.net/blog/?p=78.
50.https://agoravoting.com/.
51.InterviewwithEduardoRoblesElvira,September10,2015.
52.http://cointelegraph.com/news/111599/blockchain_technology_smart_contracts_and_p2p_law.
53.PatentApplicationofDavidChaum,“RandomSampleElections,”June19,2014;
http://patents.justia.com/patent/20140172517.
54.https://blog.ethereum.org/2014/08/21/introduction-futarchy/.
55.FedericoAst(@federicoast)andAlejandroSewrjugin(@asewrjugin),“TheCrowdJury,a
CrowdsourcedJusticeSystemfortheCollaborationEra,”https://medium.com/@federicoast/the-
crowdjury-a-crowdsourced-court-system-for-the-collaboration-era-66da002750d8#.e8yynqipo.
56.http://crowdjury.org/en/.
57.TheentireprocessisdescribedinAstandSewrjugin,“TheCrowdJury.”
58.AbriefdescriptionofthejuryselectionprocessinearlyAthensisdescribedat
www.agathe.gr/democracy/the_jury.html.
59.Seefullreportandrecommendationshere,includingadescriptionofmodelsworldwide:
www.judiciary.gov.uk/reviews/online-dispute-resolution/.
60.http://blog.counter-strike.net/index.php/overwatch/.
61.EnvironmentalDefenseFund,www.edf.org/climate/how-cap-and-trade-works.
62.Swan,Blockchain:BlueprintforaNewEconomy.
63.InterviewwithAndreasAntonopoulos,July20,2015.
Chapter9:FreeingCultureontheBlockchain:MusictoOurEars
1.“2015WomeninMusicHonoursAnnounced,”MOnline,PRSforMusic,October22,2015;www.m-
magazine.co.uk/news/2015-women-in-music-honours-announced/,accessedNovember21,2015.
2.InterviewwithImogenHeap,September16,2015.
3.DavidByrne,“TheInternetWillSuckAllCreativeContentOutoftheWorld,”TheGuardian,June20,
2014;www.theguardian.com/music/2013/oct/11/david-byrne-internet-content-world,accessedSeptember
20,2015.
4.InterviewwithImogenHeap,September16,2015.
5.In-personconversationbetweenPaulPacificoandDonTapscottatthehomeofImogenHeap,November
8,2015.
6.“HideandSeek,”performedbyArianaGrande,YouTube,LoveArianaGrandeChannel,October17,
2015;www.youtube.com/watch?v=2SDVDd2VpP0,accessedNovember21,2015.
7.InterviewwithImogenHeap,September16,2015.
8.DavidByrne,etal.,“OnceinaLifetime,”RemaininLight,TalkingHeads,February2,1981.
9.InterviewwithImogenHeap,September16,2015.
10.JohanNylander,“RecordLabelsPartOwnerofSpotify,”TheSwedishWire,n.d.;
www.swedishwire.com/jobs/680-record-labels-part-owner-of-spotify,accessedSeptember23,2015.
AccordingtoNylander,Sonyhad5.8percent,Universal4.8percent,andWarner3.8percent.Beforeits
sell-off,EMIhada1.9percentstake.
11.InterviewwithImogenHeap,September16,2015.
12.DavidJohnson,“SeeHowMuchEveryTopArtistMakesonSpotify,”Time,November18,2014;
http://time.com/3590670/spotify-calculator/,accessedSeptember25,2015.
13.MicahSingleton,“ThisWasSonyMusic’sContractwithSpotify,”TheVerge,May19,2015;
www.theverge.com/2015/5/19/8621581/sony-music-spotify-contract,accessedSeptember25,2015.
14.StuartDredge,“StreamingMusic:WhatNextforApple,YouTube,Spotify...andMusicians?,”The
Guardian,August29,2014;www.theguardian.com/technology/2014/aug/29/streaming-music-apple-
youtube-spotify-musicians,accessedAugust14,2015.
15.EdChristman,“UniversalMusicPublishing’sRoyaltyPortalNowAllowsWriterstoRequest
Advance,”Billboard,July20,2015;www.billboard.com/articles/business/6634741/universal-music-
publishing-royalty-window-updates,accessedNovember24,2015.
16.RobertLevine,“DataMiningtheDigitalGoldRush:FourCompaniesThatGetIt,”Billboard127(10)
(2015):14–15.
17.InterviewwithImogenHeap,September16,2015.
18.ImogenHeap,“PanelSession,”GuardianLive,“LiveStream:ImogenHeapReleasesTinyHuman
UsingBlockchainTechnology,SonosStudioLondon,”October2,2015;
www.theguardian.com/membership/2015/oct/02/live-stream-imogen-heap-releases-tiny-human-using-
blockchain-technology.PassageeditedbyImogenHeap,e-mail,November27,2015.
19.Ibid.
20.InterviewwithAndreasAntonopoulos,July20,2015.
21.InterviewwithImogenHeap,September16,2015.
22.Ibid.
23.StuartDredge,“HowSpotifyandItsDigitalMusicRivalsCanWinOverArtists:‘JustIncludeUs,’”
TheGuardian,October29,2013;www.theguardian.com/technology/2013/oct/29/spotify-amanda-palmer-
songkick-vevo,accessedAugust14,2015.
24.GeorgeHoward,“BitcoinandtheArts:AnInterviewwithArtistandComposer,ZoeKeating,”Forbes,
June5,2015;www.forbes.com/sites/georgehoward/2015/06/05/bitcoin-and-the-arts-and-interview-with-
artist-and-composer-zoe-keating/,accessedAugust14,2015.
25.Ibid.
26.JosephYoung,“MusicCopyrightsStoredontheBitcoinBlockChain:RockBand22HERTZLeadsthe
Way,”CoinTelegraph,May6,2015;http://cointelegraph.com/news/114172/music-copyrights-stored-on-
the-bitcoin-blockchain-rock-band-22hertz-leads-the-way,accessedAugust14,2015.
27.Pressrelease,“ColuAnnouncesBetaLaunchandCollaborationwithRevelatortoBringBlockchain
TechnologytotheMusicIndustry,”BusinessWire,August12,2015.
28.GideonGottfried,“How‘theBlockchain’CouldActuallyChangetheMusicIndustry,Billboard,
August5,2015;www.billboard.com/articles/business/6655915/how-the-blockchain-could-actually-
change-the-music-industry.
29.PeerTracksInc.,September24,2015;http://peertracks.com/.
30.“AboutUs,”Artlery:ModernArtAppreciation,September3,2015;https://artlery.com.
31.EllenNakashima,“TechGiantsDon’tWantObamatoGivePoliceAccesstoEncryptedPhoneData,”
WashingtonPost,WPCompanyLLC,May19,2015;www.washingtonpost.com/world/national-
security/tech-giants-urge-obama-to-resist-backdoors-into-encrypted-
communications/2015/05/18/11781b4a-fd69-11e4-833c-a2de05b6b2a4_story.html.
32.DavidKaye,“ReportoftheSpecialRapporteuronthePromotionandProtectionoftheRightto
FreedomofOpinionandExpression,”HumanRightsCouncil,UnitedNations,Twenty-ninthsession,
Agendaitem3,advanceeditedversion,May22,2015;
www.ohchr.org/EN/Issues/FreedomOpinion/Pages/CallForSubmission.aspx,accessedSeptember25,
2015.
33.TheUNreportrefersreaderstotheCentreforInternationalGovernanceInnovationandChatham
House,TowardaSocialCompactforDigitalPrivacyandSecurity:StatementbytheGlobalCommission
onInternetGovernance(2015).
34.TheSocialProgressImperative,SocialProgressIndex2015,April14,2015;
www.socialprogressimperative.org/data/spi#data_table/countries/com9/dim1,dim2,dim3,com9,accessed
September24,2015.Ourrankingisderivedfromthecomponentscores,notfromtheoverallopportunity
score.
35.“RegimesSeekingEverMoreInformationControl,”2015WorldPressFreedomIndex,Reporters
WithoutBorders,2015;http://index.rsf.org/#!/themes/regimes-seeking-more-control.
36.ReportersWithoutBorders,“HasRussiaGoneSoFarastoBlockWikipedia?,”August24,2015;
https://en.rsf.org/russia-has-russia-gone-so-far-as-to-block-24-08-2015,48253.html,accessedSeptember
25,2015.
37.ScottNeuman,“ChinaArrestsNearly200over‘OnlineRumors,’”August30,2015;
www.npr.org/sections/thetwo-way/2015/08/30/436097645/china-arrests-nearly-200-over-online-rumors.
38.GetGems.org,September2,2015;http://getgems.org/.
39.“Factom:BusinessProcessesSecuredbyImmutableAuditTrailsontheBlockchain,”
www.factom.org/faq.
40.InterviewwithStephenPair,June11,2015.
41.MiguelFreitas,AboutTwister.http://twister.net.co/?page_id=25.
42.MarkHenricks,“TheBillionaireDropoutClub,”CBSMarketWatch,CBSInteractiveInc.,January24,
2011,updatedJanuary26,2011;www.cbsnews.com/news/the-billionaire-dropout-club/,accessed
September20,2015.
43.InterviewwithJoichiIto,August24,2015.
44.Ibid.
45.InterviewwithMelanieSwan,September14,2015.
46.Ibid.
47.“IntroducingUNESCO:WhatWeAre.”Web.AccessedNovember28,2015;
http://www.unesco.org/new/en/unesco/about-us/who-we-are/introducing-unesco.
Chapter10:OvercomingShowstoppers:TenImplementation
Challenges
1.LevSergeyevichTermen,“ErhöhungderSinneswahrnehmungdurchHypnose[IncreaseofSense
PerceptionThroughHypnosis],”ErinnerungenanA.F.Joffe,1970.“Theremin,Léon,”Encyclopediaof
WorldBiography,2005,Encyclopedia.com,www.encyclopedia.com,accessedAugust26,2015.
2.MaciejCeglowski,“OurComradetheElectron,”speechgivenatWebstock2014,St.JamesTheatre,
Wellington,NewZealand,February14,2014;www.webstock.org.nz/talks/our-comrade-the-electron/,
accessedAugust26,2015.Ceglowski’stalkinspiredtheopeningofthischapter.
3.InterviewwithAndreasAntonopoulos,July20,2015.
4.InterviewwithTylerWinklevoss,June9,2015.
5.SatoshiNakamoto,P2pfoundation.ning.com,February18,2009.
6.KenGriffithandIanGrigg,“BitcoinVerificationLatency:TheAchillesHeelforTimeSensitive
Transactions,”whitepaper,February3,2014;http://iang.org/papers/BitcoinLatency.pdf,accessedJuly
20,2015.
7.InterviewwithIzabellaKaminska,August5,2015.
8.Ibid.
9.PrimaveraDeFilippiandAaronWright,“DecentralizedBlockchainTechnologyandtheRiseofLex
Cryptographia,”SocialSciencesResearchNetwork,March10,2015,43.
10.InterviewwithJoshFairfield,June1,2015.
11.IzabellaKaminska,“Bitcoin’sWastedPower—andHowItCouldBeUsedtoHeatHomes,”FT
Alphaville,FinancialTimes,September5,2014.
12.CIA,“TheWorldFactbook,”www.cia.gov,2012;http://tinyurl.com/noxwvle,accessedAugust28,
2015.NotethatCyprus’scarbongasemissionsinthesameperiodwere8.801millionmetricmegatons
(2012).
13.“AftertheBitcoinGoldRush,”TheNewRepublic,February24,2015;
www.newrepublic.com/article/121089/how-small-bitcoin-miners-lose-crypto-currency-boom-bust-cycle,
accessedMay15,2015.
14.InterviewwithBobTapscott,July28,2015.
15.InterviewwithGavinAndresen,June8,2015.
16.InterviewwithEricJennings,July10,2015.
17.InterviewwithStephenPair,June11,2015.
18.InterviewwithErikVoorhees,June16,2015.
19.SangjinHan,“OnFairComparisonBetweenCPUandGPU,”blog,February12,2013;
www.eecs.berkeley.edu/~sangjin/2013/02/12/CPU-GPU-comparison.html,accessedAugust28,2015.
20.InterviewwithBobTapscott,July28,2015.
21.InterviewwithValeryVavilov,July24,2015.
22.HassMcCook,“UndertheMicroscope:EconomicandEnvironmentalCostsofBitcoinMining,”
CoinDeskLtd.,June21,2014;www.coindesk.com/microscope-economic-environmental-costs-bitcoin-
mining/,accessedAugust28,2015.
23.InterviewwithBobTapscott,July28,2015.
24.my-mr-wanky,eBay.com,May8,2014;www.ebay.com/itm/3-Cointerra-TerraMiner-IV-Bitcoin-Miner-
1-6-TH-s-ASIC-Working-Units-in-Hand-/331192098368,accessedJuly25,2015.
25.“PCRecycling,”MRIofAustralia,MRI(Aust)PtyLtd.Web.August28,2015;
http://www.mri.com.au/pc-recycling.shtml.
26.InterviewwithGavinAndresen,June8,2015.
27.VitalikButerin,“ProofofStake:HowILearnedtoLoveWeakSubjectivity,”Ethereumblog,
November25,2014;https://blog.ethereum.org/2014/11/25/proof-stake-learned-love-weak-subjectivity/.
28.StefanThomasandEvanSchwartz,“RippleLabs’W3CWebPayments,”positionpaper,March18,
2014;www.w3.org/2013/10/payments/papers/webpayments2014-submission_25.pdf.
29.InterviewwithAustinHill,July22,2015.
30.InterviewwithRogerVer,April30,2015.
31.SatoshiNakamoto,“Re:BitcoinP2PE-cashPaper,”TheMailArchive,November7,2008;www.mail-
archive.com/,http://tinyurl.com/oofvok7,accessedJuly13,2015.
32.InterviewwithJoshFairfield,June1,2015.
33.InterviewwithStephenPair,June11,2015.
34.InterviewwithJerryBrito,June29,2015.
35.Ibid.
36.InterviewwithJoshFairfield,June1,2015.
37.InterviewwithAndreasAntonopoulos,July20,2015.
38.InterviewwithIzabellaKaminska,August5,2015.
39.InterviewwithStephenPair,June11,2015.
40.AndrewVegetabile,“AnObjectiveLookintotheImpactsofForkingBlockchainsDuetoMalicious
Actors,”TheDigitalCurrencyCouncil,July9,2015;www.digitalcurrencycouncil.com/professional/an-
objective-look-into-the-impacts-of-forking-blockchains-due-to-malicious-actors/.
41.InterviewwithKeonneRodriguez,May11,2015.
42.Vegetabile,“AnObjectiveLook.”
43.PeterTodd,“Re:[Bitcoin-development]Fwd:BlockSizeIncreaseRequirements,”TheMailArchive,
June1,2015;www.mail-archive.com/,http://tinyurl.com/pk4ordw,accessedAugust26,2015.
44.SatoshiNakamoto,“Re:BitcoinP2PE-cashPaper,”MailingList,Cryptography,Metzger,Dowdeswell
&Co.LLC,November11,2008.Web.July13,2015,
www.metzdowd.com/mailman/listinfo/cryptography.
45.PascalBouvier,“DistributedLedgersPartI:BitcoinIsDead,”FiniCultureblog,August4,2015;
http://finiculture.com/distributed-ledgers-part-i-bitcoin-is-dead/,accessedAugust28,2015.
46.WesternUnion,“CompanyFacts,”WesternUnion,WesternUnionHoldings,Inc.,December31,2014.
Web.January13,2016;http://corporate.westernunion.com/Corporate_Fact_Sheet.html.
47.InterviewwithGavinAndresen,June8,2015.
48.Ibid.
49.InterviewwithAustinHill,July22,2015.
50.InterviewwithGavinAndresen,June8,2015.
51.AndreasAntonopoulos,“BitcoinasaDistributedConsensusPlatformandtheBlockchainasaLedger
ofConsensusStates,”interviewwithAndreasAntonopoulos,December9,2014.
52.AndyGreenberg,“HackersRemotelyKillaJeepontheHighway—withMeinIt,”Wired,July21,
2015.
53.InternationalJointConferenceonArtificialIntelligence,July28,2015,BuenosAires,Argentina;
http://futureoflife.org/AI/open_letter_autonomous_weapons#signatories.
54.LisaSingh,“FatheroftheInternetVintCerfsForecastfor‘InternetofThings,’”WashingtonExec,
August17,2015.
55.InterviewwithKeonneRodriguez,May11,2015.
56.Ceglowski,“OurComradetheElectron.”
57.InterviewwithAnnCavoukian,September2,2015.
58.Ceglowski,“OurComradetheElectron.”
59.http://www.lightspeedmagazine.com/nonfiction/interview-marc-goodman/.
60.MarcGoodman,FutureCrimes:EverythingIsConnected,EveryoneIsVulnerable,andWhatWeCan
DoAboutIt(NewYork,Doubleday,2015).
61.InterviewwithSteveOmohundro,May28,2015.
62.TheSilverStallion,chapter26;www.cadaeic.net/cabell.htm,accessedOctober2,2015.
63.InterviewwithYochaiBenkler,August26,2015.
Chapter11:LeadershipfortheNextEra
1.StephanTual,“AnnouncingtheNewFoundationBoardandExecutiveDirector,”Ethereumblog,
EthereumFoundation,July30,2015;https://blog.ethereum.org/2015/07/30/announcing-new-foundation-
board-executive-director/,accessedDecember1,2015.
2.Ethereum:TheWorldComputer,producedbyEthereum,YouTube,July30,2015;
www.youtube.com/watch?v=j23HnORQXvs,accessedDecember1,2015.
3.InterviewwithVitalikButerin,September30,2015.
4.Ibid.
5.Ibid.
6.Ibid.
7.HenryVI,part2,act4,scene2.
8.E-mailcorrespondencewithVitalikButerin,October1,2015.
9.DavidD.Clark,“ACloudyCrystalBall,”presentation,IETF,July16,1992;
http://groups.csail.mit.edu/ana/People/DDC/future_ietf_92.pdf.
10.InterviewwithBrianForde,June26,2015.
11.InterviewwithErikVoorhees,June16,2015;interviewwithAndreasAntonopolous,July20,2015.
12.InterviewwithErikVoorhees,June16,2015.
13.InterviewwithJimOrlando,September28,2015.
14.http://www.coindesk.com/bitcoin-venture-capital/.
15.E-mailcorrespondencewithTimDraper,August3,2015.
16.InterviewwithGavinAndresen,June8,2015.
17.Ibid.
18.InterviewwithBrianForde,June26,2015.
19.InterviewwithJoichiIto,August24,2015.
20.InterviewwithJerryBrito,June29,2015.
21.Ibid.
22.www.cryptocoinsnews.com/us-colleges-universities-offering-bitcoin-courses-fall/.
23.InterviewwithAdamDraper,May31,2015.
24.InterviewwithBenjaminLawsky,July2,2015.
25.InterviewwithPerianneBoringatMoney2020,October26,2015.
26.InterviewwithJoichiIto,August24,2015.
27.InterviewwithBlytheMasters,July29,2015.
28.ForafulllistofallthemajorvictoriesLawskyachievedwhilesuperintendentofNYDFS,pleasevisit
www.dfs.ny.gov/reportpub/2014_annualrep_summ_mea.htm.
29.InterviewwithBenjaminLawsky,July2,2015.
30.Ibid.
31.Ibid.
32.InterviewwithJerryBrito,June29,2015.
33.InterviewwithBenjaminLawsky,July2,2015.
34.Ibid.
35.Requiredreadingforanyonelookingforafreshtakebyatypicallyconservativegovernmentbody:
www.parl.gc.ca/Content/SEN/Committee/412/banc/rep/rep12jun15-e.pdf.
36.Ibid.
37.InterviewwithSenatorDougBlackofCanada,July8,2015.
38.Ibid.
39.Ibid.
40.Ibid.
41.Ibid.
42.InterviewwithAaronWright,August10,2015.
43.InterviewwithJoshFairfield,June1,2015.
44.TheFederalReservewasnotthefirstnationalbankintheUnitedStates.TheFirstNationalBank,
broughtintoexistencebyCongressin1791,andarchitectedbytheUnitedStates’firstsecretaryofthe
treasury,AlexanderHamilton,wasfarmorelimitedinscopeandPresidentAndrewJacksonultimately
dismantleditssuccessor,theSecondNationalBank,in1836.
45.InterviewwithCarolynWilkins,August27,2015.
46.http://qz.com/148399/ben-bernanke-bitcoin-may-hold-long-term-promise/.
47.InCanada:www.bankofcanada.ca/wpcontent/uploads/2010/11/regulation_canadian_financial.pdf;in
theUnitedStates:www.federalreserve.gov/pf/pdf/pf_5.pdf.
48.InterviewwithCarolynWilkins,August27,2015.
49.“MoneyinaDigitalWorld,”remarksbyCarolynWilkins,SeniorDeputyGovernoroftheBankof
Canada,WilfredLaurierUniversity,Waterloo,Ontario,November13,2014.
50.InterviewwithCarolynWilkins,August27,2015.
51.Ibid.
52.InterviewwithJerryBrito,June29,2015.
53.InterviewwithSteveBeauregard,April30,2015.
54.InterviewwithJerryBrito,June29,2015.
55.DonTapscottandLynneSt.Amour,“TheRemarkableInternetGovernanceNetwork—PartI,”Global
SolutionNetworksProgram,MartinProsperityInstitute,UniversityofToronto,2014.
56.E-mailcorrespondencewithVintCerf,June12,2015.
57.www.w3.org/Payments/.
58.www.intgovforum.org/cms/wks2015/index.php/proposal/view_public/239.
59.www.internetsociety.org/inet-bangkok/speakers/mr-pindar-wong.
60.AdamKillick,“KnowledgeNetworks,”GlobalSolutionNetworksProgram,MartinProsperityInstitute,
UniversityofToronto,2014.
61.InterviewwithJerryBrito,June29,2015.
62.InterviewwithTylerWinklevoss,June9,2015.
63.InterviewwithJoichiIto,August24,2015.
64.http://coala.global/?page_id=13396.
65.www.digitalchamber.org/.
66.https://blog.coinbase.com/2014/10/13/welcome-john-collins-to-coinbase/.
67.http://www.digitalchamber.org/assets/press-release---g7---for-website.pdf.
68.AnthonyWilliams,“PlatformsforGlobalProblemSolving,”GlobalSolutionNetworksProgram,
MartinProsperityInstitute,UniversityofToronto2013.
69.InterviewwithBrianForde,June26,2015.
70.InterviewwithGavinAndresen,June8,2015.
71.www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf,7.
72.InterviewwithConstanceChoi,April10,2015.
73.Thedigitalrevolutionhasmovedonto“thesecondhalfofthechessboard”—acleverphrasecoinedby
theAmericaninventorandauthorRayKurzweil.HetellsastoryoftheemperorofChinabeingso
delightedwiththegameofchessthatheofferedthegame’sinventoranyrewardhedesired.Theinventor
askedforrice.“Iwouldlikeonegrainofriceonthefirstsquareofthechessboard,twograinsofriceon
thesecondsquare,fourgrainsofriceonthethirdsquare,andsoon,allthewaytothelastsquare,”he
said.Thinkingthiswouldadduptoacouplebagsofrice,theemperorhappilyagreed.Hewasmisguided.
Whilesmallattheoutset,theamountofriceescalatestomorethantwobilliongrainshalfwaythrough
thechessboard.Thefinalsquarewouldrequireninebillionbilliongrainsofrice—enoughtocoverallof
Earth.
74.E-mailinterviewwithTimothyDraper,August3,2015.
75.InterviewwithHernandodeSoto,November27,2015.
INDEX
Thepagenumbersinthisindexrefertotheprintedversionofthisbook.Thelinkprovidedwilltakeyouto
thebeginningofthatprintpage.Youmayneedtoscrollforwardfromthatlocationtofindthe
correspondingreferenceonyoure-reader.
Abra,20,186–88,325n
Academicinstitutions
asplayersinblockchainecosystem,286
roleinculture,246–49
Accenture,69,70
Accessibility,256–57
Accountability,10,30,108–9,303
inforeignaid,20–21,190–91
ingovernment,23,199,202,207–9,309
inmicrofinance,192
Accounting,63,64,73–79
double-entry,7,74,75,310
triple-entry,77,78–79,180
WorldWideLedger,6–8,75–77,142
Accountingfraud,74,76
AccountingWEB,74
Adams,Scott,106
Advocacynetworks,302–3
Agencycosts,107
Agencyrisk,60
Agenda,fornextdigitalage,307–9
Aggregatingeconomy,17–18,134–35,164–65
AgoraVoting,218–19
Agriculture,138–39,157–58
Airbnb,17,18,115–17,134,135,270
Allaire,Jeremy,71–72,75–76
Allianz,156
AlliedControl,261
Altcoins,60,257
Amazon,13,72–73,118,122,123
AmericanAssociationofIndependentMusic,230
AmericanSocietyofComposers,AuthorsandPublishers(ASCAP),229
Andreessen,Marc,5,9,80,311
AndreessenHorowitz,178–79,284
Andresen,Gavin,51,104,285,305
implementationchallenges,257,260,262,271–72
Angaritis,DinoMark,31–32,115,131,153
Animatingobjects,22,155,156–61
Anti–moneylaundering/knowyourcustomer(AML/KYC),42,44,302
Antonopoulos,Andreas,70,125,128,225,233,255
designprinciples,40,47–48
digitalidentity,15,264–65
re-architectingthefirm,86,96,97,98,102
AOL,255
Apple,13,118,150,161,229,235
Applicationspecificintegratedcircuits(ASICs),261
ArabSpring,200
Ariely,Dan,279
Art(artists),21,239–43
buyingthroughbitcoinblockchain,240–42
ownershiprights,45–49,132–33
profileofnext-genpatron,242–43
Artificialintelligence(AI),91,123,265,274
Artist-centricmusicmodel,231–35
Artistsandrepertoire(A&R),238–39
Artlery,239–43
Ascribe,132–33,243
Assetownership,19–20,193–95
Asymmetriccryptography,39–40
Athey,Susan,111
Attentionmarkets,140–41
Attestation,infinancialservices,56,57,58
Auction/dynamicpricingmechanisms,234
Audits,6–7,63,75–77,78
Augur,82,83,84–85,181,220,224
Australianoutback,powerpoles,145,146–47
Authenticatingidentityandvalue,infinancialservices,61,64
AutomatedClearingHouse(ACH),59,293
Automatedsubsidiaryrightsmanagement,234
Autonomousagents,22,120,121,122–25,126,321–22n
Autonomousvehicles,156–57,165–67
Back,Adam,34,41
“Backdooraccess,”244
Backgroundchecks,176
bAirbnb,115–17
Balanc3,76,178
Bandcamp,235
BankofCanada,9,294,296
BankofEngland,9,294
Bankruptcylaws,174
Banks.SeealsoCentralbanks;Financialservices
unbankedandunderbanked,170–72,175–78
Barclays,68–69,75
BarclaysAccelerator,68–69
Barhydt,Bill,187–88
Beauregard,Steve,297
Behavioralchange,257
Bengloff,Rich,230
Benkler,Yochai,94,107,277
newbusinessmodels,129–30,134,135,139
Bernanke,Ben,294
Berners-Lee,Tim,281
BigBrother,244,274–75
Bigdata,44,151,225
BigSeven,128–42
Birch,David,177
Bitcoin,5–10,278–79
buyingartthroughblockchain,240–43
designprinciples.SeeDesignprinciples
implementationchallenges.SeeImplementationchallenges
theplayers,283–89
BitcoinFoundation,305
BitcoinLightningNetwork,59,288
BitcoinMagazine,279
BitcoinWeekly,279
BitcoinXT,271–72
BitFury,261
BitGo,287,303
BitLicense,286,291
BitMoby,50–51
BitPay,48,72,246,260,263,266
BitTorrent,34,119,246
Black,Doug,292–93
BlackBerry,150
Blackboxmarketing,97
Blackboxofidentity,14–16
Blockapedia,131,224
Blockchain
distributedledgertechnology,6–8,18
governancenetwork,298–308
howitworks,6–8
implementationchallenges.SeeImplementationchallenges
planforprosperity,17–23
playersinecosystem,283–89
promiseandperilof,24–26
rationalexuberancefor,8–10
sevendesignprinciples.SeeDesignprinciples
BlockchainAlliance,303–4
Blockchaincooperatives,134–35
BlockchainIPOs,82–84,127,180,181
Blockchainjudiciary,220–21
Blockchainmakers,138–39
Blockchainvoting,215–17
Blockcom,90,127
BlockingWebsites,244–45
Blockstream,28,38,65–66
Blocktime,255–57
Bootstrapping,34
Boring,Perianne,208,287,288
Boundarychanges,92–109
Boundarydecisions,109–14
Bouvier,Pascal,269
Brand,Stewart,129
BrettonWoodssystem,281,295–96,298
Brito,Jerry,263,264,286,287,291,297,301
BroadcastMusic,Inc.(BMI),229
Brody,Paul,33
Brown,JohnSeely,94
Brown,RichardGendal,69
BTCjam,81
Buildingmanagement,inIoTs,159–60
Businessbuilding,componentsof,179–80
Businessmodels,115–44,168
autonomousagents,122–25
bAirbnbvs.Airbnb,115–17
BigSeven,128–42
distributedapplications,117–22
distributedautonomousenterprises,126–28
hackingyourfuture,142–44
Buterin,Vitalik,87–88,262,278–80
autonomousagents,123,125
consensusmechanisms,31
futarchy,220
re-architectingthefirm,18,87–88,96,100–101
Buzzcar,137
Byrne,David,227
Byrne,Patrick,83
ByzantineGenerals’Problem,241
Cabell,JamesBranch,277
CaliforniaPublicEmployees’RetirementSystem,77
Campusmicrogrids,148
“Canonicalpersona,”16,140
Cap-and-tradesystem,222–23
CapitalintheTwenty-FirstCentury(Piketty),173,175
Carlyle,James,69
Cars,137,164–67,165–67
Cavoukian,Ann,27,28,41,42,51–52,275
CBWBank,73
Ceglowski,Maciej,254,275
Centralbanks(banking),9,31,57,286–87,293–96,309
Cerf,Vint,274,281,299
Chain(company),67–68
ChamberofDigitalCommerce,208,287,288,302,303
Change.org,304
Chase,Robin,137
Chaum,David,4,219
Chesky,Brian,135
China,13,56,174,243–45,264,266–67,272
Choi,Constance,288,307
Christie,Chris,98
Circle,83,284
CircleInternetFinancial,71–72
CiscoQuad,139
CivilJusticeCouncil,U.K.,221
Clark,David,281
Clark,Jeremy,215
Climatechange,149,221–23
Cloudcomputing,118,122
CoalitionforAutomatedLegalApplications(COALA),301–2,303
Coase,Ronald,74,92–93,100,105,121,142,319n
Cohen,Bram,119,262
Coinbase,44,83–84,284,302
CoinCenter,286,287,302,303
CoinPip,217
Collaboration,139–42
Collins,John,302
Colu,238
CommitCoin,215
“Commons-basedpeerproduction,”129
Competitiveadvantage,64,66,110–11,140
Complexinstructionsetcomputer(CISC),260–61
CompuServe,118
Computerviruses,122,123
Computing,evolutionof,150–52
Conflictadjudication,100,105,219,221
Conflictsofinterest,100,125
Consensusmechanisms,30–33,36–37,95,98,262,266,305
ConsensusSystems(ConsenSys),15,87–92,99,101,112–14,130
Consideration,10,30
Conspiracytheories,213
ContentID,235
Contractbreaches,104,258
Contractingcosts,99–101
Contracts.SeeSmartcontracts
Coordinationcosts,92,93,105–7,121,142,166
Copyright,45–49,132–33,228–31,234,236,237–38
Corecompetencies,110–12
Corporateboundaries
changing,92–109
determining,109–14
Corporategovernance,infinancialservices,73–79
Corporations,reconfiguringasengineofcapitalism,21–22.SeealsoNewbusinessmodels;Re-architecting
thefirmCorruption,19,20–21,50,188–89,193–94,195–96
Counterpartyrisk,59
Coursera,248–49
Creativeindustries.SeeArt;Music
Creditcards,4,36,42–43,62,79
Creditscores,62,79–82,177
Criminaluses,4,9,128,275–76,303
CrisisCommons,189
Crowdfunding,82–83,128,181,245–46
CrowdJury,220–21
Cryptocurrencies,5,9–10
Cryptoeconomics,119,321n
Culture,21,226–50.SeealsoArt;Musicontheblockchain,249–50
privacy,freespeechandfreepress,243–46
roleofeducation,246–49
Cuomo,Andrew,289
Cyberclones,42
Dataanalytics,233–34
Databreaches,39,43,92,118,151–52
Datamining,36
David,Paul,57
Decentralization,91–92,106–7,117–18,162–63,293–96
DeclarationofIndependence,19
DeclarationofInterdependence,308–9
Deegan,Patrick,81
DeFilippi,Primavera,258,264,265,288
Delegativedemocracy,218–19
Deliberativepolling,223
Deliverynetworks,301–2
Deloitte,68,76–77,78
Democracy,9,13,23.SeealsoGovernments;Votingalternativemodelsofpoliticsandjustice,218–21
ontheblockchain,214–15
engagingcitizenstosolvebigproblems,221–23
seconderaof,211–15
toolsoftwenty-first-century,223–25
Democratizedentrepreneurship,179–81
DEMOS,215–16
Desertification,149–50
Designprinciples,29–52
distributedpower,33–35
ingovernment,201–3
inclusion,49–51
networkedintegrity,30–33
privacy,41–56
rightspreserved,45–49
security,39–41
valueasincentive,35–39
DeSoto,Hernando
citizenrights,200,201,310
economicrights,19–20,56,174,178,193,194,310
Developers,asplayersinblockchainecosystem,285
Diasporas,306–7
Dictatorslearningcurve,265
DigiCash,4,247
DigitalAssetHoldings,63,65
Digitalbrainstorming,223
Digitalcertificates,40
Digitalcontentmanagementsystem,238
DigitalCurrencyAssociation,U.K.,302
DigitalCurrencyGroup,86,284
DigitalCurrencyInitiative(DCI),247,282,284,286,301,303,305
DigitalEconomy,The(Tapscott),164,212,309
Digitalidentity,15–16,140,176,177–78,197–98,203–4,264–65
Digitalregistryofartwork,132–33,242–43
Digitalrightsmanagement(DRM),132,234
DilbertPrinciple,The(Adams),106
Directdemocracy,214,218
Diseasemanagement,151,158
Disney,Walt,246
Disputeresolution,100,105,193,219,221
Distributedapplications(DApps),117–22
bAirbnb,115–17
Distributedautonomousenterprises(DAEs),22,120,121,126–28,143–44,273–74
Distributedcapitalism,25,49,163
Distributedledgers,6–8,18,64,65,156,181,208–9
Distributedpower,33–35,202
Distributeduseraccounts,37
Documentkeeping,159,205
Domingo,Analie,182–83,186–87,325n
Double-entryaccounting,7,74,75,310
Double-spendproblem,30–31,132
Downey,Paul,205
Draper,Adam,286–87
Draper,Tim,284,310
Drugtherapies,151,158
Dylan,Bob,110
ECash,4
Economicpower,12–13,172–75
Economicrights,19–20,45–49,132–34,172,175
Edelman’sTrustBarometer,10
Education
playersinblockchainecosystem,286
roleinculture,246–49
Edwards,Jim,200
Electricityconsumptionofblockchain,24,259–63
Electronicvoting(e-voting),198,215–17
Ellipse(album),227–28
Emergencyservices,inIoTs,158
Empowerment,107,208
Encryption,28,40,243–44,314n
End-to-end(E2E)e-votingsystems,215–16
Energyconsumptionofblockchain,24,259–63
Energygrids,145–50
Energymanagement,inIoT,157
Enigma,27–28
Enterprisecollaborators,139–42
Entrepreneurship,22–23,179–81
EnvironmentalDefenseFund,222
Environmentalmonitoring,inIoTs,158
Epigraph,194
Ernst&Young,33,36
Essex,Aleks,215
Estonia,197–99,203,204,206–7
Ethereum,37,83,87–88,119,262,278,279–80
Exchangingvalue,infinancialservices,62,64
ExecutiveOrder6102,258
Facebook,13,81,118,140,180,246
Factom,94,194,245–46
FactoryofThings,160
Faircompetition,93–94
Fairfield,Josh,34,263,264,293
Fairtrademusic,227–39
Farming,157–58
FeaturedArtistsCoalition,226
FederalReserve,U.S.,57,174,293,294
FedEx,147
Fiatcurrencies,217,255,292,293–96
cryptocurrenciesvs.,5,38,256,260
FICOscore,80,82
51percentattack,67,266–67,269
Filament,146–48,157,260
Financialaidforstudents,248–49
Financialcrisisof2008,5,10,56,108,193,293,296
Financialidentity,15–16,140,176,177–78,179
Financialinclusion,asfundamentalright,19–20,172,175
Financialintermediaries,56,57,58,61
Financialleverage,56
Financialrisk,59–60,63,64
Financialservices,55–86.SeealsoMicrofinance
blockchainIPOs,82–84
blockchaintransformationsof,8,18–19,58–63,64,128
frameworksforaccountingandcorporategovernance,73–79
GoldenEightof,61–63,64,86
identityissues,61,64,78–79
paradoxesoftraditionalfinance,55–57
playersinblockchainecosystem,285
predictionmarkets,84–85
reputationandcreditscore,79–82
retailservices,71–73
smartdevicesandIoT,159
fromstockexchangestoblockexchanges,63,65–66
Financialstability,295
Financialutility,69–70
FirefoxWeb,129
FirsteraoftheInternet,3–4,12–14,15,39,49,92,95,106,124,265,281–82,299–300
“Float,”45
FNYCapital,83
Foodindustry,138–39,157–58
Ford,Henry,246
Forde,Brian,247,282,286,287,305
Foreignaid,20–21,188–92
Formationcosts,179
Fragmentingpublicdiscourse,212–13
Freeagentnation,110
FreedomofInformationlaws,208–9
Freepress,243–46
Freespeech,243–46
Freitas,Miguel,246
Funding,infinancialservices,62–63,64
Fund-raising,179
Futarchy,220
FutureCrimes(Goodman),276
Future-proofing,152,197
GalaxyZoo,12
Gauck,Joachim,52
Gault,Mike,199
Gemini,284,291
Gems,94–95
Genderdifferences,inbankingaccess,178,192
Germany,27,51–52
GetGems,245
Gibson,William,255
GitHub,89,138
Globalsolutionnetworks(GSNs),283,300–307
Globalstandardsnetworks,304–6
“GodProtocol,The”(Szabo),4–5
Gold,34,95,199,254,260
GoldcorpChallenge,223
GoldenEight,61–63,64,86
GoldmanSachs,66,70,71,284
Goodman,Marc,276
Google,13,96,118,140,143,161,180,255,270,275
Gore,Al,212
Governance,24,283,288–89,307
distributedpower,33–35,273
infinancialservices,73–79
newframeworkforblockchain,298–307
regulationsvs.,296–97
GovernmentDigitalService,U.K.,205
Governments,9,13,23,197–225
alternativemodelsofpoliticsandjustice,218–21
BigBrother,244,274–75
blockchainvoting,215–17
designprinciplesin,201–3
empoweringpeopletoserveselvesandothers,207–11
engagingcitizenstosolvebigproblems,221–23
Estoniaexample,197–99,203,204,206–7
infinancialservicesindustry,70
high-performanceservicesandoperations,203–7
playersinblockchainecosystem,286–87
seconderaofdemocracy,211–15
stiflingortwistingbitcoin,263–65
toolsoftwenty-first-century,223–25
Grande,Ariana,228
Greifeld,Bob,65,66,84
Guardtime,199
Guez,Bruno,238
Gunrights,200–201,276
Gupta,Vinay,226,227
Hacking,39,40,41,118–19,138,151–52,243–44
boundarydecisions,112–14
businessmodelinnovation,142–44
DAEs,273–74
smartthings,168–69
Hagel,John,94
Haiti
earthquakeof2010,20–21,188–89
remittances,183
Haldane,Andrew,9
Hamel,Gary,110
Hanks,Tom,78
Hanson,Robin,220
Hashcash,34
Hashrate,241,260
Hashvalue,32
Hawking,Stephen,274
Healthcare,151,158
Heap,Imogen,21,226,227–28,229,231–35
Hearn,Mike,69,164–65,271,282
HedgeStreet,84
Hedgy,105
Herstattrisk,59–60
Hewlett-Packard,150
Hierarchies,12,88,93–101,105–6
Highlatency,256–57
Hill,Austin,28
designprinciples,38,40–41,43,51
financialservices,63,65–67,76
implementationchallenges,262,272
Holacracy,48–49,88
HollywoodStockExchange,84
Homemanagement,161,275
Homomorphicencryption,28
Honduras,193–95
Honesty,10,11
Horizontalsearch,97
Humanitarianaid,20–21,188–92
HumanRightsWatch,200
HyperledgerProject,69–70,285,305
IBM,39,111,118,129–30,150,153
IBMConnections,139
IBMInstituteforBusinessValue,163
Ideagoras,137,138
Identity,3–4,14–16,264–65.SeealsoDigitalidentityinbAirbnb,116
forcitizens,197–98,203–4
economicinclusionand,176,177–78
infinancialservices,61,64,78–79
forIoTs,147–48
personalavatars,14–16,45,99,204
privacyand,41–45
Ilves,ToomasHendrik,197
Implementationchallenges,24,195–96,253–77
BigBrotherwatchingyou,274–75
criminaluse,275–76
DAEsformingSkynet,273–74
energyconsumptionunsustainable,259–63
governingprotocols,271–72
governmentsstifleortwistit,263–65
incentivesinadequatefordistributedmasscollaboration,267
jobkiller,270–71
powerfulincumbentsusurpingit,265–67
technologynotreadyforprimetime,254–58
Inaccessibility,256–57
Incentives,35–39,130–31,202,267
Inclusion,49–51,202–3,308
economic,asfundamentalright,19–20,175
Incumbency,265–67
Independentcontractors,103–4,137–38
Industrialblockchain,154,160
Inequality,12–13,173,174,175
Infinitedata,151,162,274–75
Inflation,37–38,256
Infrastructuremanagement,157,206–7
InnoCentive,95,137–38
Inno360,95,137
In-OutMatrix,111–12,112
InstituteforBlockchainStudies,110,204,224,248
InstituteforLibertyandDemocracy,19
Insurance,63,64,116–17,159,181
Insuringvalue,infinancialservices,63,64
Integratedgovernment,203–5
Integrity,10,30–33,74,76,108,199,201–2
Intel,38,155
Intellectualpropertyrights,21
art,239–43
music,226–39
InternationalCorporationforAssignedNamesandNumbers(ICANN),271,281,300,301
InternationalLabourOrganization,172–73
InternationalMonetaryFund,183,281,295
InternationalTelecommunicationsUnion,195
Internet,firstera.SeeFirsteraoftheInternet
InternetEngineeringTaskForce(IETF),271,281,299,305
InternetGovernanceForum(IGF),300
InternetofThings(IoT),3,38,146,147–48,152–55
economicpayoffs,161–64
futuredevelopments,164–67
hackingyourfuture,168–69
publicsectoruseof,206–7
twelvedisruptions,156–61
InternetSociety,281,300
Intrade,84
Investing,infinancialservices,62–63,64
IPOs(initialpublicofferings),82–84,127,180,181
Iran,13
Ito,Joichi,246–49,286,289,301
Jaques,Elliot,106
Jennings,Eric,147–48,157,162–63,260
Jensen,Michael,100,108
Jive,139
Jobanputra,Jalak,287
Jobkiller,270–71
JPMorganChase,8,43,63
JumpstartOurBusinessStartupsAct,82–83
Jurisdictionissues,264
Justicesystem,220–21,223
Kahn,Bob,281
Kahneman,Daniel,279
Kaminska,Izabella,78,257–58,266
Karpeles,Mark,247
Kaye,David,244
Kaye,Max,216
Keating,Zoë,21,235–36,237
Kessler,Sarah,135
Keylesssignatureinfrastructure(KSI),199
Kidder,Tracy,150
Kim,Joyce,170–72,177,287
Kirby,Peter,194
Knowledgenetworks,300–301
Kulin,Haluk,43,46,48,178
Kurzweil,Ray,336n
Labormarkets,270–71
Landtitleregistration,8,19–20,51,188–89,193–95,198
Larsen,Chris,59,67
Lawenforcement,286–87
Lawprofession,102–3
Lawsky,Benjamin,8,287,289–92
Leadership,24,281–309
frameworkforgovernance,298–307
newagendafornextdigitalage,307–9
theplayers,283–89
regulationand,289–93,296–97
Lederman,Leon,4–5
LedgerofEverything,152
LedgerofThings,145–69
economicpayoffs,161–64
evolutionofcomputing,150–52
futuredevelopments,164–67
hackingyourfuture,168–69
InternetofThings,152–55
powertothepeople,146–50
twelvedisruptions,156–61
Legaldisputes,100,105,193,219,221
Legalframeworks,264
Legalrecourse,lackof,258
Lendingvalue,infinancialservices,62,64
Libertarianism,199–200,201,327n
LibraryofCongress,133
Licensedexchanges,291
Lightfoot,Gordon,29
Lighthouse,94
Lih,Andrew,131
Lincoln,Abraham,199
LinkedIn,99
Linux,12,88,129–30,141,282
LinuxFoundation,69,285
Lipset,SeymourMartin,201
Liquiddemocracy,218–19
Liquidity,256,295
Litecoin,257
LitecoinAssociation,267
Literacy,172,195,249
LiveNation,229
Livingstandards,172
Locallygeneratedpower,148,149–50
LondonSchoolofEconomics,74
LO3Energy,148,149
Lubin,Joseph,15–16,88–91,112–13,141,177–78
Ludwin,Adam,68
Lundkvist,Christian,76
Lyft,134,164
MaidSafe,95
Mainframes,150
MalaysiaAirlinesFlightMH370,213
Managers(management)
ConsenSys,89–91
publicsector,206–7
smartdevicesandIoT,157,159–60,161
ManifestofortheDigitalAge,308–9
Manila,remittances,182–83,186
Manufacturing,160,174
Marketing,searchcosts,97
Massiveopenonlinecourses(MOOCs),248–49
Masters,Blythe,8,63,65,66,68,73,287,289
McAdam,Cindy,287
McKinsey,156,163–64,169,194
McLuhan,Marshall,14
McWaters,Jesse,66,306
Meckling,William,100
Medicalrecords,158
Medici,83
Memberownership,89–91
Membersofasocialnetwork,262
Meshnetworks,123,146–47
Metaverse,38
Meteringeconomy,135–36,180,233
MHITs,50–51
Microblogging,246
Microfinance,56,170–72,191–92
currentissueswith,191–92
inclusiondesignprinciple,49–51
Nicaraguaexample,170–72,176
prosperitypassport,177,178
Microgrids,148–50
Micromonetizing,180–81,233
Microsoft,4,150,270,310
MicrosoftYammer,139–40
Millennials,174
Mi.Mu,228
Miners,30–32,240–41,260,267,268–69
Mining,240–41,259–60,268–69
Miningrate,38
MintPal,266
MITBitcoinProject,247
MITDigitalCurrencyInitiative,247,282,284,286,301,303,305
MITMediaLab,27,246–47,286,305
M-of-Nsignature,104
Monegraph,133
Monetarypolicy,37–38,56,294–95,309
Moneylaundering,176,275–76
Monks,Robert,78
Monopolies,57,93–95
Moore’slaw,4,51,307–8
Moreira,Carlos,11,14,15,154,204
Morgan,Pamela,219,287
Mornini,Tom,73–74,77
Morris,Gilbert,173
Motiondetectors,254
Movingvalue,infinancialservices,61,64
M-Pesa,176
Mt.Gox,9,247
Mugabe,Robert,216–17
Muller,Ralf,237–38
Mulligan,Mark,230
Multisignature(multisig),103–5
Multistakeholders,282,297,298–99
Murdoch,Rupert,310
Music,21,226–39
A&R,238–39
basiccopyrightregistration,236,237–38
businesscomplexity,228–31
digitalcontentmanagementsystem,238
emergenceofnewbusinessmodel,231–35
ownershiprights,45–49,132–33
self-launchedartists,235–37
smartcontracts,47,231
Musiccopyright,45–49,132–33,228–31,234,236,237–38
MusicKey,236
Musk,Elon,274
MyBarackObama.com,224
Nadex,84
Napster,21,263
NASDAQ,83–84
NASDAQLinq,65
Nathan,Oz,27–28
NationalInstituteofStandardsandTechnology,40
NationalRifleAssociation,200–201,276
NationalSecurityAgency,42,274
Naturaldisasterrelief,20–21,188–89,190–91
“NatureoftheFirm,The”(Coase),92–93
Nest,275
Networkedinstitutions,306
Networkedintegrity,10,30–33
Networkedintelligence,164
Networkeffects,51,67,175
Networkprotocol,271–72
NeutralVotingBloc(NVB),216
Newbusinessformation,rateof,173–74
Newbusinessmodels,115–44,168
autonomousagents,122–25
bAirbnbvs.Airbnb,115–17
BigSeven,128–42
distributedapplications,117–22
distributedautonomousenterprises,126–28
hackingyourfuture,142–44
NewYorkIDcards,80,176
NewYorkStateDepartmentofFinancialServices(NYDFS),287,289–92
NewYorkStockExchange(NYSE),83–84
Ng,Andrew,248
Nicaraguanmicrofinance,170–72,176
Nielsen,Jakob,51
Nielsen’slawofInternetbandwidth,51,272
Nike,136,180–81
Nodes,32,240–41
Nonces,241
Nondisclosureagreements,235
Nongovernmentorganizations(NGOs),191,287
Norton,Robert,133
OASIS,38
Obama,Barack,213,224–25
OMERSVentures,284
Omohundro,Steve,46–47,109,265,277
Onlinecitizenjuriesandpanels,223
OpenGovernment,209
Opennetworkedenterprises(ONEs),22,120,121–22,128–42
blockchaincooperatives,134–35
blockchainmakers,138–39
enterprisecollaborators,139–42
meteringeconomy,135–36
peerproducers,129–32
platformbuilders,136–38
rightscreators,132–34
Opensource,60,64,69–70,129,262,281–82
OP_RETURN,237–38
Oralagreements,99
Orlando,Jim,284
Orsini,Lawrence,148,149
Ostrom,Elinor,48
Outsourcing,12,93,95,174
Overstock,83
Ownershiprights,45–49,132–34,234
Ownersofcoin,37
Ownersofcomputingpower,37,262
Ownersofdiskstoragespace,262
Pacifico,Paul,226,227
Pacioli,Luca,74,75
Pair,Stephen,48,72,246,260,263,266
Pandit,Vikram,55,59–60
Passingrate,156
Passivecitizenry,211–12
Paul,Rand,199
“Payforsuccess”models,209–10
PayPal,6,80,94,310
Paytoscripthash(P2SH),104
Peercollaborators,139–42
Peerproducers,129–32
PeersInc.(Chase),137
Peer-to-peersharingeconomy,17–18
PeerTracks,238–39
Performancerightsorganizations(PROs),229
PermaRec,76–77
Permissionedblockchains,67–68,86
Personalavatars,14–16,45,99,204
PersonalBlackBoxCompany,43,46,48,49,81,178
Picopayments,191–92,233
Piketty,Thomas,173,175
Piscini,Eric,68,76,185
PlainWritingActof2010,213
Platformbuilders,136–38,304
Poissonprocess,32
Policingcosts,230–31
Policynetworks,302
Politicalbalkanization,212–13
Politicalparties,210–11
Politicalreputations,210–11
Porter,Michael,110–11,314n
Powergrids,145–50
Prahalad,C.K.,110
Predictionmarkets,84–85,98,220,224–25
PrettyGoodPrivacy(PGP),40
Privacy,27–28,41–45,141
bAirbnband,116
BigBrother,244,274–75
breakthrough,42–44
freespeechandfreepress,243–46
governmentand,202,204,274–75
implications,44–45
preservingrightof,48–49,202
principleof,41
problemtobesolved,41–42
PrivacyandBigDataInstitute,27,275
Privateblockchains,67–68
Procter&Gamble,95
Productivity,93,108,110,155,162
Productivityparadox,57
Proofofactivity,32
Proofofasset,38
Proofofburn,315n
Proofofcapacity,32
Proofofdisk,262
ProofofExistence(PoE),46
Proofofproperty,38
Proofofstake,32,40–41,262
Proofofstorage,32–33
Proofofwork(PoW),31,32,35,41,46,241,259,262
51percentattack,67,266–67,269
Propertymanagement,inIoTs,159–60
Propertyrecords,8,19–20,51,188–89,193–95,198
Propertyrights,19–20,48–49,188–90
Prosperity,4,17–23,182–88.SeealsoMicrofinance;Remittancesassetownership,193–95
humanitarianaid,20–21,188–92
implementationchallengesandleadershipopportunities,195–96
roadmapto,178–81
Prosperityparadox,51,172–75
Prosperitypassport,177–78
Prosperitypurgatory,175–76
Prosumers,136–37,180–81
Protocols,271–72
Publicdiscourse,212–13
Publicityrights,48–49
Publickeyinfrastructure(PKI),39–40,43
Publicledgers,242
Publicpolicyandimplementation,213–14,302
Publicvalue,partneringtocreate,209–10
Putin,Vladimir,244
Pyramidofrights,48
Quantumcomputing,277
Rajgopal,Kausik,194
Ramamurthi,Suresh,73
Random-sampleelections,219
Reagan,Ronald,199
Realestate,159–60
Re-architectingthefirm,21–22,87–114.SeealsoNewbusinessmodelsbuildingConsenSys,87–92,112
14
changingboundariesofthefirm,92–109
determiningcorporateboundaries,109–14
Recordkeeping,159,205
Recordlabels,228–31,234–35,236
Recruitingprocess,searchcosts,96–97,98
Recyclingequipment,261–62
RedCross,20–21,188–90
Reddit,88,129,130,248,301
Redistributedcapitalism,25,49,163
Reducedinstructionsetcomputer(RISC),260–61
Regulation(regulators),9,174,289–93,295
governancevs.,296–97
playersinblockchainecosystem,286–87
roleinfinancialservicesindustry,70
WorldWideLedger,75–76
Remittances,20,59,182–88
Analie’sstory,182–83,186–87
Renewableenergy,148,149–50
ReportersWithoutBorders,244
Representativedemocracy,211–12,214–15
Reputation,12,16,37
bAirbnband,116
creditscoreand,79–82
fairmusicindustry,234
financialservices,63,64,79–82,84
networkedintegrityand,30–33
peerproductionand,130–31
political,210–11
Requestforproposal(RFP),160
Resiliency,84,148–49,154
Resourceextraction,157–58
Retailbankingservices,71–73
Retailoperationsandsales,inIoTs,161
Revelator,238
Richdatabases,233
Rightscreators,132–34,234
Rightspreservation,45–49,202
“Righttobeforgotten,”78
Ripple,32,37,94,257,262
RippleLabs,59,67
Riskmanagement,59–60,63,64,116
Rivest,Ron,320n
RoblesElvira,Eduardo,218,219
Rodriguez,Keonne,266,274
RonenV,132–33
Roosevelt,FranklinDelano,34
Rossiello,Elizabeth,287
Roth,Kenneth,200
Royalties,229–31,232,233
R3Consortium,69–70,305
Russia,9,243–44,253–54
Safaricom,176
Sales,161,179
SalesforceChatter,139
Salesforce.com,118
Santander,58
Sarbanes-OxleyAct,74
SatoshiNakamoto,5,6,133
designprinciples,29–31,34–37,39–42,50,152,282,308
implementationchallenges,256,263,269
Scalability,152,285,288
ScalingBitcoin,288
Scalingbitcoin.org,305
Scalingignorance,213
Scenarioplanning,223
Schelling,Thomas,279
Scherbius,Arthur,27
Schmidt,Eric,270
Schneider,Nathan,259
Searchcosts,95–99,121–22,142
Securehashalgorithm(SHA-256),32,40,259
Securemultipartycomputation,28
SecuritiesandExchangeCommission(SEC),83
Security,39–41,141,314n
bAirbnband,116
breakthrough,39–41
governmentand,202
implications,41
principleof,39
problemtobesolved,39,255
Self-AwareSystems,46
Self-launchedmusicians,235–37
Self-service,207–11
Sequencesearch,97
Serialexpropriation,200
Serviceaggregators,17–18,134–35,164–65
SETLcoin,70
Settlementrisk,59
Sevendesignprinciples.SeeDesignprinciples
ShapeShift,260
Shapiro,Melanie,287
Shareholders,11,78–79,100,107,125–28
Sharingeconomy,17–18,134–35,187
Sidechains,60
Silbert,Barry,86,284
SilkRoad,9,276
Simplifiedpaymentverification(SPV),50
Simpson,Arianna,287
Skogstad,Anselm,240
Skynet,273
Slack,89
Smartcontracts,101–3,109,126,142,219
aidgroupsand,190
DApps,120,121
definitionof,101–2
MFIsand,192
multisigauthentication,103–5
ownershiprightsand,46–48
forpoliticalreputations,210–11
Smartdevices,150–54
economicpayoffs,161–64
futuredevelopments,164–67
hackingyourfuture,168–69
twelvedisruptions,156–61
Smarthomes,161,275
Smartlocks,117
Smartpills,151,158
Smartwallet,83,131,153
SnowCrash(Stephenson),38,315n
Snowden,Edward,243
Socialcontracts,99
Socialenergy,148–50
Socialproduction,129–32
SocialSecurity,80,176
Societalchange,257–58
SocietyforWorldwideInterbankFinancialTelecommunication(SWIFT),42,59,262
SocietyofEuropeanStageAuthorsandComposers(SESAC),229
Song,Dawn,288
SonyMusicEntertainment,229,230
SoulofaNewMachine,The(Kidder),150
Spain,AgoraVoting,218–19
Spam,34,39,255,321n
Spotify,88,229,230,239,319n
Srinivasan,Balaji,178–79
Stakeholders,262
Standardsnetworks,304–6
Stark,Elizabeth,288
Steiner,Peter,3
Stellar,32,37,170–71
StellarDevelopmentFoundation,170–71
Stephenson,Neal,315
Stiglitz,Joseph,35–36,57,107
Storingvalue,infinancialservices,61–62,64
Storj,95,120
Streamingmusic,229,230
Streamingopenandtrusteddata,208–9
Streamium,233
Studentdebt,248–49
SUber,165–67
Subledger,73–74
Surveillance,25,42,44–45,212,243–44,274–75
Swan,Melanie,110,204,224,247–49
Sybilattacks,36,37,315n
Systemicrisk,59
Szabo,Nick,4–5,37,101–2,255
TalkingHeads,227,228
“Taps,”146–47
Tapscott,Bob,261,268
Taylor,Simon,75
TCP/IP(TransmissionControlProtocol/InternetProtocol),43,50
Technology
democracyand,212–14
asimplementationchallenge,254–58
Termen,LevSergeyevich,253–54,277
Termsofthird-partyengagement,234
Tezos,95
Theoryofthefirm,92–93,100,105–6,121,319nTheremin,253–54
Thiel,Peter,93–94
360-degreedeals,229
Ticoll,David,25,109,134
Tinsley,Michelle,155
Titleregistration,8,19–20,51,188–89,193–95,198
Todd,Peter,133,268
Toolsofabundance,178–79
Top-downmanagement,89,92,106
Tor,263
Torvalds,Linus,88,282
Totalitarianism,34,52,141,145
TradeNet,165
Tradingvolume,256
Transactionalcapacity,255
Transactioncosts,92–93,95–101,107,142,193,269
Transparency,10,11,298
aidgroupsand,190–91
designprinciplesand,30,39,41,44,45
financialservicesand,66–67,77
governmentandpoliticalinstitutions,205,210,296
MFIsand,192
musicand,232–33,236
Transportation,137,156–57,164–67,206
Treat,David,70
Triple-entryaccounting,77,78–79,180
Trump,Donald,210
Trust
achievinginthedigitalage,10–11
costsof(re-)building,107–9,143
networkedintegrity,30–33
inpoliticalinstitutions,201–2
TrustBarometer,10
Trusteddata,208–9
Trustedsystems.SeeWalledgardens
Trustprotocol,4–6,58,309–11
Turingcompleteness,278
22Hertz,237–38
Twister,246
Twowaypeg,60
Uber,17,118,134,135,164–65,270
Ulbricht,RossWilliam,9
Unbankedandunderbanked,170–72,175–78
Unemployment,173
UNESCO,249
UNICEF,189–90
Unicoin,190
Uniquenodelist,32
UniversalMusic,229,230
Usagedataanalytics,233–34
Utilitygrids,145–50
Valueasincentive,35–39,202
Valueinnovation,60
Valuetemplates,232
Vavilov,Valery,261,268
“Vectorsofdisruption,”163
Vegetabile,Andrew,267
Venturecapitalists(VCs),284,287
Ver,Roger,263,284
VeriCoin,266
VerifyID,116
Verisart,133
Verticalsearch,97
VirtruCorporation,40
Virtualprivatenetworks(VPNs),118
Visa,187–88
Vogogo,72
Voorhees,Erik,56,81–82,260,284
VoterIDfraud,217
Voterintimidation,216–17
Voterturnout,200–201
Voting,198,202,214–15,218–19
electronic(e-voting),198,215–17
Waldemeyer,Moritz,228
Wales,Jimmy,282
Walledgardens,13,70,265
WarnerMusicGroup,229
WassenaarArrangement,243–44
Wastemanagement,inIoTs,157
Watchdognetworks,303–4
Watermanagement,inIoTs,157
WealthofNetworks,The(Benkler),277
Wealthtax,173
WeatherDApp,124–25
Weathernet,123–24
WeatherNodes,123–25,147,158
WesternUnion,20,56,115,185–86,187–88
WhatsApp,184
White,Derek,68–69
Wikinomics,128,137
Wikipedia,12,129,130–32,282
Wilkins,Carolyn,9,294,295–96
Williamson,Oliver,93–94,100,105–6,320n
Windowingstrategy,235–36
Winklevoss,Tyler,175,255–56,301
Winter,Alex,21
Wisdomofthecrowds,84–85,221
WISeKey,11,14,154,204
Womenleadersinblockchain,287–89
Wong,Pindar,300,305
Wood,Gavin,119
WorldBank,193,295,300
WorldEconomicForum(WEF),175,270,306
WorldHealthOrganization,281
WorldTradeOrganization,281
WorldWideLedger,6–8,75–77,95–96,142
WorldWideWebConsortium,271,299
Wozniak,Steve,129,274
Wright,Aaron,103,258,264,265,293
YouTube,230,234,235,236
Zeall,Anson,217
Zelaya,Manuel,193
ZerotoOne(Thiel),94
Zimbabwe,voterintimidation,216–17
Zipcar,134,137,187
Zyskind,Guy,27–28
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